Crypto: Watch the Moves, Not the Charts ……

Ok, I am now crypto convinced. Cryptocurrencies need to be watched very closely. But, possibly not for the reasons one might think. Weirdly, my crypto thoughts have been infected by Covid-19. Let me explain. A recently watched ‘Panorama’ documentary on future pandemics got me thinking about the collision of massively expanded population centres and our planet’s wildlife.

On a map, China and India’s territories have not changed too much(sorry Hong Kong) over the past 40 years, accounting for just over 8% of the world’s land mass. However, the mix of occupants of these lands has shifted dramatically. The two countries now account for 25% of the wildlife species on the planet and a whopping 35% of global humanity. The big change is in the latter number – since 1980 there are an extra 1 billion people living in ever-closer quarters to a quarter of the world’s wildlife. Now recall SARS(2002), Swine Flu(2009), Ebola(2014), MERS(2015) as recent and increasingly frequent precursors to our current Coronavirus and glimpse our future – two habitats threatened by a failure to plan and understand the dangers of encroachment. I see a species habitat battleground. But, I also see a crypto economic battle ground. Really?

Yes, really. But, also virtually. The pandemic public health emergency split the global economy into separate commercial (goods/professional services) and social (lifestyle) crises which required differing treatments. In the commercial world, essential activity was supported by government and central bank funding across the globe. However, the social world was prescribed restrictions, lockdowns and profoundly changed human behaviours. In turn, social activity accelerated its move in to the digital world as Zoom, Netflix, TikTok, gaming, YouTube etc picked up the connectivity slack. But there’s more than connectivity. Much more, a whole economy.

The Creator Economy is not a new thing. We’ve gone from the Kardashians, Howard Stern, Beliebers etc to Joe Rogan, El Presidente, Tyler Blevins, MeganPlays and PewDiePie. More followers, more communities and more money have followed the digital revolution but there’s a danger we are thinking in media content terms only. We need to re-set our understanding of where the internet can take us.

The best thing I have read in the past month was ‘The Great Online Game’ by Packy McCormick on his blog. Two things really struck me reading through his piece:

1. Think of the internet as an always-on video game where you star in the game. You value communities, being curious, building relationships, collaborating and….. having fun.
2. Crypto, token (NFT) and Wall street ‘meme’ trading are communities of participants sharing experiences, knowledge and fun. Those that fixate on the imminent collapse of crypto and the daily value gyrations miss the point. Crypto is in-game money for the internet.

Wow. I can imagine a future for a digital credit system which is earned online and becomes a store of option value in your life or career. In effect, it’s an alternative currency underpinned by the values of the online community. That’s the future. Significantly, recent newsflow suggests governments and regulators know digital currencies are coming. However, they are uncomfortable about the implications of digital currencies from the social online world “infecting” the activities of the physical commercial economy. Watch the following developments carefully:

• China has banned cryptocurrency trading since 2019 but has taken a digital view. Its central bank has just launched a digital version of the Yuan which is deployed on blockchain technology and is a first for a major global economy.

• El Salvador has become the first country in the world to adopt a digital currency(Bitcoin) as legal tender. High levels of un-banked citizens and reliance on emigrant remittances in El Salvador will resonate with populist leaders in other developing world economies. And, it’s not just the little guys…

• A Bank of International Settlements (BIS) study found that 60% of the world’s largest central banks are researching their own digital currencies.

It is true cryptocurrencies are super-volatile and hardly reassuring as every day exchanges of value. For illustration, Bitcoin having topped $60,000 is currently trading back down closer to $35,000. However, some players are now backing crypto with dollar assets. And that’s now posing some interesting questions for banking regulators as crypto grows in size and begins to potentially impact or “infect” the wider economy. Consider the following:

• Tether is a crypto platform which backs its so-called ‘stablecoin’ with US commercial paper(CP). According to latest disclosures by Tether, and reported by the FT, its holdings of $30 billion of CP would make the firm the seventh largest CP player in the world. This market is worth more than $1 trillion and helps companies to raise short-term cash for payrolls and inventories. Clearly, regulators won’t want any shocks or volatility in that critical corporate funding market.

• Bitcoin is the largest cryptocurrency but owner concentration could be considered a potential risk in the future. It is believed that more than 50% of bitcoins are owned by just 2,500 trading entities. On recent peak valuations that’s almost $500 billion in a small number of hands. And what hands might be the most pressing regulatory question of the day? Criminals love crypto.

• The wider economy “infection” by crypto is most clearly illustrated by a huge increase in cyber crime accompanied by ransoms demanded in cryptocurrencies. The bad news is that companies are choosing to pay rather than face the disruption faced by the HSE here. US oil pipeline company Colonial paid a crypto ransom in recent weeks and Brazilian meat giant, JBS, has reportedly just paid an $11 million ransom. Crypto is the fingerprint-free way of extracting ransoms and is possibly the biggest legal threat the asset class faces if the authorities seek to shut down cyber criminals.

• The EU Cybersecurity Agency (ENISA) have just reported that large-scale malicious attacks on “critical sectors” doubled to 300 in 2020.

Perhaps we should shift our focus away from the currency aspect of crypto. Possibly more interesting is the blockchain technology which is integral to the secure recording of any digital currency transaction. Ethereum has its own currency but its blockchain infrastructure lets people build apps and products with money embedded in the code. Now let’s return to that thought about the Creator Economy and the Online Game.

Whatever the currency there is no doubt in my mind there will be digital versions/tokens to be accumulated by all internet players/users in the near future. So rather than torturing yourself with FOMO or forecasting the direction of travel of any particular crypto currency might we suggest a different play? Think about the social economy and three ways your commercial world might benefit:

1. Create. There will be communities and currency/tokens to reward you.
2. Follow. Be curious, join communities, collaborate and invest in other creators/tokens.
3. Learn. Expertise in blockchain and Ethereum-type platforms will be very valuable.

Like the maps of China and India, crypto price charts don’t really capture the bigger picture. Indeed, there will be many crypto observers over the coming years saying “game over” but the moves being made by central banks, creators, online communities and traders say something very different – “Game On!”

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