Over the last few years, we’re transitioning from a process of redefining financial services, by altering the architecture that underpins our financial system. Fintech companies are becoming mainstream, but they’ve operated on the outskirts of the traditional financial system. Much of today’s payment infrastructure was built years ago to allow business-to-consumer payments, trade financing, and supply chain activities. Many of these payments use a common template, have a lot of manual overlays, and are typically costly. We can have a fundamental shift where we go from manual to automated with the growth of blockchain technology at scale. Central banks are trying to figure out how to make this new technology without having negative effects, as they try to find the best way to make it more effective. The growth trend in cryptocurrencies is expected to continue. Some, including myself, believe that cryptocurrencies will replace existing fiat currencies. One thing is certain, no one can remain blind to current events in the crypto world and its growing importance for the financial system.
Ilias Louis Hatzis is the founder and CEO at Kryptonio wallet.
Find out why Kryptonio is the safest and simplest crypto wallet.
We are still early in the game. The global market capitalization of crypto assets stands at $1.4 trillion. When you benchmark the value of crypto assets against the value of all financial assets now in the capital markets, the truth is that it is still far too small to pose any significant systemic danger.
From an investor’s perspective, there are certain limitations. To begin with, there is a great deal of noise and confusion. Cryptocurrency is a volatile and turbulent environment. The development of non-fungible tokens (NFTs), as well as blockchain’s capacity to redefine processes and flows, are all factors to consider.
Today there are many moving pieces and it’s still difficult to predict how things will turn out. With anything new, the process is never a straight line.
The opportunities for retail investors are essentially cryptocurrencies and NFTs. But for institutional investors, there are other areas of opportunity: Consumer-facing business models, such as Coinbase, which provide access to digital assets. Then there’s the infrastructure that goes into making the ecosystem popular, such as payment apps, scalability, and compliance and regulatory solutions. The development of DeFi, or decentralized finance, is the third. The potential set for these protocols will grow as more assets are digitized.
However, the potential risk for retail investors is the unregulated nature of a lot of trading venues. We’ve seen major hacks in which exchanges were wiped out and investors who held funds on these exchanges lost their money.
Despite the inherent dangers crypto may pose, the construction of much-needed financial infrastructure is underway, and investors are increasingly able to use custodial services of institutional quality. As time progresses, professional and ordinary investors will be provided with the tools they need to manage and protect their crypto holdings.
When you trade in a highly volatile asset class using leverage, you have a potentially explosive mix. A steady improvement in the regulatory framework is occurring, and a greater number of exchanges are becoming compliant.
Speaking about regulation it’s important to look at how the United States is addressing it. At this point, several financial regulatory organizations are completely committed to the adoption or mainstreaming of blockchain technology into the financial sector: the Office of the Comptroller of the Currency (OCC), the Federal Reserve, the New York Department of Financial Services, the SEC and the Financial Crimes Enforcement Network (FinCEN).
The OCC has granted licenses to three new digital banks this year, including a bank that does not deal in fiat money. This is a significant development that opens up the door to new ideas and permitted public blockchain to be integrated into the traditional payment system, which was previously not allowed in the country.
FinCEN has announced that the travel rule, which applies to transactions over a certain threshold, will be applied to all digital asset transactions as well. To align with the mainstream financial system, know-your-customer and anti-money laundering procedures would have to be followed.
The Securities and Exchange Commission (SEC) has ruled that while Bitcoin as such is not a security, Bitcoin assets or tokens can be defined as a security and thus subject to its supervisory authority. Initial coin offerings to raise funds from the public against the issuance of cryptocurrencies are required to be registered with the SEC, similar to other initial public offerings
So far, the United States has taken some steps in the right direction to encourage innovation, while also limiting the activities of bad actors. But other countries like China need to be more open. Few would argue that China’s recent crackdown on cryptocurrency trading and mining has contributed to the recent plunge in the value of bitcoin and other cryptos. Truth be told, China wants to undermine bitcoin to incubate its own fledgling e-currency and reboot the international financial system. In many other countries, it is completely unregulated and in most, there might not be the usual legal avenues to pursue when people are defrauded. Ultimately, having the right regulatory framework could become a competitive advantage in this space.
There is no such thing as a risk-free investment in the financial world. As quickly as bitcoin falls, it can just as quickly rise again. Investing in crypto is about risk and your willingness to accept both gain and loss. It is conceivable that the benefits will be more muted as a result of environmental concerns becoming a higher priority, the crackdown in China, and the worries of central banks across the globe. But since no one has a crystal ball, it is impossible to predict the future.
Everyone should consider making a modest investment in cryptocurrency. Bitcoin and crypto is not just a new technology, but it is also a new asset class. Bitcoin has been the most rapidly appreciating asset over the past ten years, and tokenization technology will have an impact on every other market. On a daily basis, cryptocurrency is becoming part of the fabric of our financial system. Future markets will tokenize their stocks, shares, oil contracts, and commodity futures, all based on the same technology as Bitcoin. Traditional fiat currencies are becoming outdated because they are unable to provide a comprehensive answer to the problems of our world.
Having even a modest amount of disposable amount of capital in your portfolio for cryptocurrency exposure will guarantee you will not get left behind when the market begins to expand even more rapidly. Start with a small amount of money and buy only invest what you can afford to forget.
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