Five cryptocurrency trends – and what these new payment flows mean for Europe
Cryptocurrencies are no longer niche. With trillions of dollars of value locked up in the crypto-sphere, many financial institutions and payment providers are considering the implications for their business – and the potential to provide related products and services.
The cryptocurrency story began a little over a decade ago. For most of that time, the phenomenon probably felt quite remote to most people. But, this year, it has been forcing its way into the mainstream.
In April 2021, for example, Reuters reported that the market capitalisation of cryptocurrencies had surged beyond US$2 trillion1. In July, the European Central Bank kicked-off a project to investigate the launch of its own digital currency2. And, by September, the Economist was suggesting it may be wise to add Bitcoin to any investment portfolio3.
So, what is driving the clamour of attention around cryptocurrencies? And what does it mean for Europe’s payment ecosystem?
We identify five main trends:
Bitcoin becomes digital gold
Ever since it burst on to the scene in 2008, Bitcoin has been capturing the headlines. In the early days it was talked of as true digital cash. But, given its high volatility, few buyers or sellers considered using it for everyday payments. Instead, it has become established as an asset class – a type of digital gold.
Indeed, with a finite number of Bitcoin in circulation, rapid appreciation, and transparent ownership records, it has become a popular savings mechanism, especially among younger generations. And preliminary insights from Visa commissioned research shows4 that these consumers, many of whom live in Europe, typically acquire cryptocurrencies several times a month, and would like to use their retail banking app to manage the process.
Stablecoin use continues to grow
Stablecoins, such as USD Coin (USDC) from Centre or USDP from Paxos, are cryptocurrencies that are backed by and pegged to other assets, usually fiat currencies. They therefore lack the volatility of other types of digital currencies but enjoy the functional benefits of blockchain-based payments, such as near instant settlements, low processing costs, and an elimination of counterparty risk.
Hence, the use of stablecoins is growing. By mid-2021, the combined market capitalisation of the top three had exceeded US$110 billion5, with transaction volumes running into tens-of-billions of dollars every month. Some start-ups have even avoided using traditional bank accounts, preferring to receive their venture capital funding in stablecoins, and to use them to pay remote workers, contractors and suppliers, especially those based overseas. Therefore, in the future, it is likely that each of the major fiat currencies will have stablecoin equivalents, which will be used for everyday business-to-business and treasury transactions.
Financial services are being offered through code, not just by companies
The blockchain is not just about payments. Public blockchains are also being used to build other types of financial services, such as saving and borrowing products. And this means that, through a phenomenon called decentralised finance – or DeFi – financial services can be provided via decentralised technology, rather than a centralised company.
In the case of lending, a consumer can go to a DeFi platform and lend their funds to earn interest or borrow against collateral they deposit. The process is real-time and instant, no credit check is required, and the experience is seamless. Also, the interest rates may be in the region of 6-8%, compared to an average of around 0.07% for a fiat currency savings account (albeit without the usual regulatory protections).
This DeFi space is early in its development, it is still largely experimental, and currently entails a lot of risk. Yet the disruptive impact for traditional banks could be significant, and it is therefore an area that warrants attention.
NFTs are becoming a new form factor for digital media
In the beginning, crypto enabled the creation of a new asset class, with Bitcoin being a new type of digital gold. It then evolved to encompass a new form factor for existing currencies, with USDC being an alternative manifestation of the US dollar. It is now evolving again, to encompass a new form factor for digital media, including images, audio, and video – in the form of non-fungible tokens (NFTs).
Simply put, NFTs are tokens stored on a blockchain. Because they are unique and not interchangeable, they are attracting interest and investment as the digital answer to collectables. This means they can be traded like other types of crypto assets. And they already represent a significant market, with total sales volume for NFTs, according to a recent article, reaching US$2.5 billion in the first half of 2021 alone.6
Central banks actively investigate the potential
Intrigued by the potential of cryptocurrencies, many of the world’s central banks have begun to actively investigate the opportunity to issue their own digital currencies. Like stablecoins, these Central Bank Digital Currencies (CBDCs) would be tied directly to fiat currencies and would offer the functional benefits of the blockchain.
The momentum is growing. For example, the People’s Bank of China is working with five commercial banks to run a live pilot across four cities, while the European Central Bank has begun the investigation phase of its digital euro project. Meanwhile some emerging economies, such as The Bahamas, have already gone live.
“With this much happening, it’s clear that cryptocurrencies have arrived in Europe and that they are here to stay,” says Nikola Plecas, Europe Crypto Business Lead at Visa. “For financial institutions and fintechs, this brings new opportunities to meet the emerging customer needs and to create new revenue streams. The first step is to think about what is required to interact with the world of crypto. This includes capabilities to take custody of digital assets, to operate digital wallets, and to safely and securely transfer cryptocurrencies across public blockchain networks.”
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1 Crypto market cap surges to record $2 trillion, bitcoin at $1.1 trillion, Reuters, April 2021: https://www.reuters.com/article/us-crypto-currency-marketcap-idUSKBN2BS1I7
2 Eurosystem launches digital euro project, European Central Bank press release, July 2021: https://www.ecb.europa.eu/press/pr/date/2021/ html/ecb.pr210714~d99198ea23.en.html
3 Why it is wise to add bitcoin to an investment portfolio, The Economist, September 2021: https://www.economist.com/finance-and-economics/2021/09/25/why-it-is-wise-to-add-bitcoin-to-an-investment-portfolio
4 Visa research was carried out through Appinio in June 2021 among 1,405 respondents in UK, Germany and Spain.
5 Three stablecoins’ market cap triples to $110 bn, Financial Mirror, September 2021: https://www.financialmirror.com/2021/09/21/three-stablecoins-market-cap-triples-to-110-bln/
6 NFT sales volume surges to $2.5 bln in 2021 first half, Reuters, July 2021: https://www.reuters.com/technology/nft-sales-volume-surges-25-bln-2021-first-half-2021-07-05/