The year 2020 has been exceptional for good and bad reasons. While the economic and health crisis has affected the entire economy and all industries, the development of crypto-assets markets has nevertheless continued: institutionalization, regulation, adoption, innovation and even inflation.
In this document, Adan offers a review of the most significant events of the past year and shares its forecasts for the evolution of the industry in 2021. The Association also makes some recommendations to the public and private sectors, as well as to users of digital assets, to support the momentum of 2020 and the promises of 2021.
2020: Milestones for the sector
Institutionalisation: central banks, regulators and oversight authorities
On the Old Continent:
- The European Commission unveils its regulatory plans for the crypto-assets markets: MiCA for cryptocurrencies, utility tokens and stablecoins; the Pilot Regime for security tokens. While this is a promising first step, these texts leave room for needed improvements.
- The European Central Bank (ECB) is expanding its considerations on the digital euro, as evidenced by its work within the Bank for International Settlements (BIS), the publication of its Report on a digital euro and its consultation to which more than 8,000 respondents (including Adan) took part; Christine Lagarde is considering the issuance of the digital euro in the next two to four years.
- The legal framework for digital asset service providers (PSAN) is fully effective in France. The players presenting a money laundering or terrorism financing risk are all regulated by the AMF and the ACPR (French regulators).
- The obligations of French players in the field of the fight against money laundering and terrorist financing (AML-CFT) have recently been drastically tightened.
On the New World side:
- The U.S. banking regulator (the OCC) opens markets to traditional players by authorizing the custody of crypto-assets by banks, the use of public blockchains (registration of transactions and participation in validation), and the use of stablecoins in their payment activities (among others).
- The OCC also granted the first banking license to a “non-traditional” player: Anchorage thus becomes the first player to obtain bank status.
- The Securities Exchange Commission (SEC) is suing Ripple for unregistered sale of securities.
- The proposed STABLE bill, which would prohibit the issuance of stablecoins and services thereon without federal authorization, is proposed to Congress.
Traditional private enterprises enter the market
- Paypal is opening its crypto-assets purchasing service to its American customers, with the goal of offering it to the rest of the world in 2021, as well as on the Venmo platform.
- Companies like MicroStrategy & Square, are turning to Bitcoin in the face of low returns on investments in “traditional” finance.
- Many investment funds, such as Grayscale and Pendal Group, are seeing their assets under management grow very rapidly (AUM triple at Grayscale to reach $19 billion by the end of 2020) and are launching new products based on bitcoin and other crypto-assets.
- Visa is partnering with Circle to enable card issuers to send and receive USDC payments.
- Institutional players have an openly – and often newly – positive view of crypto-actives, especially in the US: Citibank, Goldman Sachs, JP Morgan, BlackRock, etc.
- The Chicago Mercantile Exchange (CME) is about to launch contracts on ETH. The S&P Dow Jones Indices will also offer indices on crypto-actives.
- The BFMBusiness network dedicates a weekly program to the crypto-assets markets, a first on French television.
Markets and innovation are not running out of steam
- Coinbase, the world’s largest trading platform for crypto-assets, announces its IPO: futures on the IPO price value the company at more than $70 billion.
- The capitalization of all crypto-assets exceeded one trillion dollars, buoyed by market movements at the end of the year.
- Assets under management in decentralized finance (DeFi) have reached more than $20 billion in several dozen protocols.
- Phase 0 of Ethereum 2.0 was successfully initiated in December, a step prior to the switch to a more energy-efficient consensus mechanism.
- Tezos reduces gas consumption by approximately 75% with its fourth Delphi amendment.
- Ark lance une filiale Protokol aux Pays-Bas pour adresser le marché des professionnels.
- Several new public protocols are being deployed: Avalanche, Polkadot, NEAR, Solana, etc.
Adan reaches 60 members in one year.
2021: Trends and forecasts
The institutionalisation of crypto-asset should go accelerate
- Regulatory oversight is expected to continue around the world. By the end of 2021, all the largest crypto-asset exchange platforms should be regulated in a jurisdiction that complies with FATF/GAFI standards (United States, EU, Asia).
- DAOs – decentralised autonomous organisations – could benefit from legal recognition and could register legally (project underway in Wyoming). The most pioneering jurisdictions in this area would benefit from the new economic dynamics of these new decentralised structures.
- However, focus on these assets could lead to an overreaction by regulatory authorities and institutional investors, with long-term risks for their development. These decisions could take the form of over-regulation or even a ban on non-hosted wallets, the mandatory implementation of an unsuitable travel rule, firm refusals to deal with crypto-assets, etc.
- No major breakthroughs are expected in central bank digital currencies (CBDC).
- Legal action against illegal or non-compliant projects (e.g. against unregistered financial offerings, unregulated platforms, scams, etc.) should help to clean up the market.
Interconnection between the traditional world and the digital asset industry could intensify
- The industry is expected to grow rapidly in size and visibility. In the wake of Coinbase, other companies in the sector could go public.
- It is likely that traditional finance will embrace crypto-assets, whether it is to retain assets, operate platforms or deploy decentralised finance projects. At least one large bank could create a custody offering and offer access to crypto-assets to its clients through a regulated broker.
- At the same time, companies in the sector should continue their institutionalisation. It is very likely that a large company in the sector will become a full-fledged bank offering credit services.
- A bubble linked to the growing interest in “DeFi” (decentralised finance) use cases is likely to form. If this happens, its explosion would lead to the end of many more or less serious projects: this general stabilisation of the market would allow some to stand out and continue their development.
- The first retail stablecoin payment offer could see the light of day, leading to an explosion in payment volumes in these assets. At the same time, an increasing number of companies could accept payments in crypto-assets and would operate without a bank account.
- The industry could experience its “GDPR moment”. Companies would make considerable efforts to bring themselves into compliance. Nevertheless, it is likely that some of them would refuse such constraints: they would then disappear or turn to less strict or even unregulated jurisdictions. The question of the connections between these two “industries” would inevitably arise.
- The development of dedicated training offers, or ad hoc modules within secondary education degrees, could be generalised within higher education institutions.
- Savings in crypto-assets should become commonplace, with a significant inflation in the number of specialised funds and the number of companies choosing to invest part of their cash in crypto-assets. As a result, the number of individuals and companies holding crypto-assets would increase considerably.
Markets and innovation should continue to rise
- Technical progress should not run out of steam: layer 2, generalisation of payment solutions, deployment of ambitious technical updates, etc.
- The total capitalisation of crypto-assets should continue to appreciate strongly, by the conjunction of the exponential development of demand, the generalisation of staking which reduces the mass in circulation, and the development of new uses and products attracting new categories of buyers.
- A generalised awareness of the interest of public networks and the innovation it allows around value networks and new cases of use could lead to the abandonment of many private consortia projects.
- The explosion in the volume and market cap of USD-referenced stablecoins should continue, with the blessing of regulators (FinCEN and OCC) and increased partnerships with the payment industry (VISA in the first instance).
- If European regulations excessively limit the innovation of decentralised applications, these would nevertheless continue to exist outside of any regulation. Two categories of users of crypto-assets would coexist, depending on whether or not they use purely decentralised tools (DAOs, decentralised identity, etc.).
Adan is expected to reach 120 members.
2021: Recommendations and good resolutions
The impetus provided by 2020 promises an ambitious year 2021 for the development of the ecosystem. In order to accompany the sector, the Adan makes a few recommendations for the attention of the various stakeholders concerned by this dynamic:
For policy makers
- Promote the development of the ecosystem by favouring a positive and constructive tone, avoiding spreading disinformation. This ecosystem participates in the dynamism of the French productive fabric, and shows remarkable resilience in these troubled times.
- Deploy targeted and concrete actions to accelerate the development of the national crypto-asset infrastructure (exchange platforms, brokers, funds, market makers, stablecoins, etc.). Crypto-assets are a sovereignty issue, like the banking or financial industry. It is necessary to foster the development of expert players of significant importance.
- Ensure an ambitious legislative and regulatory framework that protects investors and consumers while allowing the highest possible degree of innovation, particularly in the field of stablecoins or decentralised finance (DeFi).
- Monitor in particular the development and valorisation of crypto-assets in order to assess their medium to long term economic potential.
For regulatory and supervisory authorities
- Maintain up-to-date knowledge of markets and innovations. Slowing down regulatory changes should make it possible to observe and understand markets in order to provide them with appropriate and proportionate regulation.
- Extend the scope of discussions with ecosystem players in order to benefit from a long-term vision on crypto-actives and their uses.
- Accelerate the VASP application and registration process; commit to a precisely established schedule and limit latencies as much as possible considering the damaging impact of a lasting suspension on business activity.
- Integrate the competitiveness factor into regulatory considerations.
For banking and financial players
- Initiate dialogue with industry actors in a relationship of mutual trust. Understand and seize market opportunities and new offers or products that can be created on crypto-assets.
- Become the first to join forces on developments such as offers dedicated to the sector, payment services in stablecoins, etc.
- Remain open to the wealth of blockchain technologies, and in particular be open to considering the use of public networks.
- Diversify cash investments with crypto-assets and become familiar with the underlying technology and its constraints (private keys, portfolios, smart-contracts, etc.).
For future users
Investing and saving in crypto-assets requires knowledge of the basics and best practices related to the holding and exchange of these assets because of their singularity compared to traditional financial products and services. There are very good online resources for self-taught people, and an association whose mission is to support users.
Adan team is available to discuss the content of this strategic note.