Cryptocurrencies appeal to family offices because their value is immune to misguided government policies which lead to inflation and economic disruption.
Others are now hoping to turn the technology to their own advantage. Regulators across the world are coming to terms with the asset class. The rollout of a Chinese digital currency is imminent. Facebook is pushing a global crypto-currency initiative, viewed as a potential US response.
All this, and more, confirms crypto’s move into the mainstream following the Federal Reserve’s massive injection of liquidity into the system to pacify the coronavirus threat.
The Basel’s proposal is a step on crypto’s road to respect…
A Swiss family office led by Roger Studer is the sector’s newest fan, following its decision to lead a $275 million fundraising by Bitcoin Suisse.
Studer, former head of investment banking at Vontobel, says Bitcoin Suisse: “Stands as a market leader in the Swiss crypto-financial space, poised to grow rapidly.”
Hedge fund manager Paul Tudor Jones has invested in bitcoin as a hedge against inflation due to actions taken by the Federal Reserve to stimulate the market.
Canadian manager 3IQ, led by investment veterans Jean Luc Landry and Fred Pye have just raised $48 million for a groundbreaking bitcoin ETF.
The launch has delighted Tyler and Cameron Winklevoss of Genesis, veteran bitcoin backers. Mark Zuckerberg, who eased Facebook out of their hands, is developing his Libra “stablecoin”, a cryptocurrency linked to specific currencies.
His early backers fell away, along with a plan to create a new currency. But Stuart Levey, who Zuckerberg appointed very recently to head his crypto business, is a serious appointment, given he led the fight against illicit finance at successive US governments before becoming HSBC chief legal officer
Yeomans Capital, a family office run by David Johnston, is backing crypto startups. Galaxy Investment Capital’s Michael Novogratz is developing crypto as an asset class for institutions.
Peter Thiel’s Founders Fund was a big buyer of bitcoin in 2018. Pantera Capital’s Dan Morehead thinks bitcoin could hit $115,000 by May 2021, against the recent $8,930.
Tim Draper of DFJ, an early backer to Skype and Tesla, is a devout believer in free markets and bitcoin fits that agenda. He reckons bitcoin could hit $250,000 by 2023.
A decade has passed following the mysterious disappearance of Satoshi Nakamoto, author of the software programme which drives bitcoin, the longest-established cryptocurrency.
As opposed to central bank verification, bitcoin uses a virtual ledger system, known as blockchain, to register money changing hands.
Changes in the ledger are verified by freelance software programmers, known as miners, who are paid in new bitcoin when they crack a code.
As Nakamoto intended, the number of bitcoin units the miners receive for each verification was halved on 11 May. This reduction has encouraged bitcoin’s fanatical followers to believe they can drive the price of bitcoin higher in a tight market. The price fell 40% in value during February’s dash for liquidity, but soon made up much of this year’s lost ground.
Over the years, excessive speculation has often produced volatility in the bitcoin price. Its rise to $20,000 in 2017 was partly driven by some official recognition in a few countries, such as Japan. The momentum also proved self-fulfilling. Bullish investors went on to argue that crypto offered investors portfolio diversification.
Momentum was lost when bitcoin adverts were banned and stories of hacking and manipulation circulated. By the end of 2018, the price skidded below $4,000.
But the crypto message was not lost on Christine Lagarde, then head of the International Monetary Fund. She said in a blog: “We can harness the potential of crypto-assets while ensuring that they never become a haven for illegal activity or a source of financial vulnerability.”
In July, Fed chairman Jerome Powell said he did not rule out crypto becoming a global currency, adding it only made up speculative assets at that point.
In June 2019, the Financial Action Task Force said digital service providers, including exchanges, should share customer data, to prevent money laundering. Implementation of the standard, due by the middle of this year, will calm fears that crypto-currencies have been extensively circulated by anonymous criminal elements.
Only this May, after stealing confidential data about celebrities from a US legal firm in May, the thieves demanded ransom payments in bitcoin.
In December 2019, The Basel Committee on Banking Supervision, sponsored by the Bank of International Settlements, produced proposals for the banking sector relating to prudential regulation.
The Basel proposal expressed concern over a broad range of issues including volatility, liquidity, credit and market risks.
The Basel consultation notes the possibility that cryptocurrencies could be undermined if the small number of miners in charge of the verification process acted in concert.
Over the years, the BIS has also expressed concern over the massive complexity of the verification process as well as environmental issues relating to its excessive use of energy.
Basel has said that banks should fully deduct crypto-assets from core reserves. This is a tough measure viewed as “absurdly restrictive” by the Swiss Bitcoin Association.
But Basel’s proposal is a step on crypto’s road to respect. A final reform will also need further consultation. While accepting Basel’s thrust, several respondents said it was important to rank crypto assets in terms of risk.
According to PwC: “One might view stable coins or asset-backed tokens as having less inherent risk than a crypto-currency, due to the fact they are supported by an underlying asset.”
This view picked up on the Lagarde theme that the technology behind cryptocurrencies will merit intense scrutiny, even where current applications are less desirable. Brian Brooks, chief operating officer of the US Office of the Controller of Currency sees potential in a licensing system: “Increasingly, it looks a lot like crypto is banking for the 21st century.”
France and Germany have produced proposals for the regulation of crypto-assets. The Bank of England has expressed interest. Venezuela has introduced a crypto-currency, banned by the US, with possible help from Russia.
China, however, is the elephant in the cyber-room. It has been developing a national blockchain system capable of anchoring a digital currency. This will be introduced in phases with digital money paid direct into digital accounts.
US protagonists say China could tell its citizens how to spend digital payments and fear their use outside China. They fear it could undermine the status of the dollar as a reserve currency. Which could have interesting consequences for bitcoin’s reputation as a hedge against financial chaos.