Key Contacts: Andrew Tzialli – Partner
Whilst the bulk of my working day as a lawyer is spent advising on venture capital/private equity investments and acquisitions, advising companies involved in crypto has been part of my practice for around 10 years. For the record, I don’t like term “crypto” – it harps back to a time when most digital assets built on blockchain tech were being touted as cryptocurrencies, despite very few of them attempting to replace traditional currencies or being any form of “currency” at all, but given it’s the widely adopted term, we’ll run with that!
In that 10 or so years, crypto has swayed between being referred to as the next “must have asset” and “the future of finance” to “the world’s biggest Ponzi scheme” (click here for a correlation between press sentiment and the price of Bitcoin).
The number of scandals over the years haven’t helped public perception, nor has the volatile nature of the sector. Mt Gox crypto exchange collapsed in 2014; The Bitfinex exchange was hacked in 2016 with investor funds stolen; Billions of dollars were invested and lost between 2014 and 2017 in the pyramid scheme behind the fraudulent cryptocurrency OneCoin; In 2023 the CEO of crypto exchange FTX was convicted of fraud in the US following the collapse of FTX and the loss of around $8bn in investor funds. This collapse triggered a significant downturn in the crypto industry, partly contributing to a number of crypto lenders, such as BlockFi and Celsius, becoming insolvent and also ceasing operations (resulting in further losses).
Headline grabbing events aside, a broader, more objective view can also be taken when you look at the following:
- Until recently, the crypto sector has proceeded without the protection of tailored legislation governing how its various sub-sectors are to operate.
- Despite a reputation for being the currency of choice for criminals, estimates show that crypto wallets linked to illicit activity made up less than 0.25% of all crypto transactions in both 2021 and 2022.
- • Whilst the collapses and fraud cases can easily sway opinion, there are numerous cases of regulated, international banks of repute, having made some bad decisions during the last 15 years, which, but for government bailouts, would have resulted in investor losses far exceeding most of those seen in the crypto sector.
- Whilst the traditional financial system and investment markets have had generations to develop and mature, crypto has had just over a decade.
So where are we now?
On 10th January 2024, in a landmark decision, the US Securities and Exchange Commission approved 11 bitcoin ETFs (exchange-traded funds), with more applications now expected. More importantly, these applications were being made by some of the world’s biggest investment funds, including BlackRock, Fidelity and Invesco. These ETFs give anyone from pension funds to ordinary investors access to bitcoin via mainstream US funds, without having to buy the asset itself or set up a digital wallet. As well as the billions of dollars that are expected to flow into crypto, potentially contributing to gains in values (though that’s never certain), this can be deemed a watershed moment in the wider adoption of crypto. Now that the SEC has signed-off on the bitcoin ETFs, will ETFs for other mainstream cryptocurrencies (such as ether) follow suit?
Given this year will also see a huge uptick in crypto firms across Europe registering under the EU wide MiCA rules (MiCA is the EU crypto legislation which came into play during 2023), here are some of my thoughts on what lies ahead in crypto:
- Mainstream Adoption Should Accelerate: Once again (and not for the first time) crypto will become a household name. Major players in finance and tech are diving into the blockchain pool, making crypto assets more accessible than ever. We’ll start to see traditional banks offering crypto services to big corporates and integrating blockchain, at that point, the era of mainstream adoption is upon us.
- Sustainability Matters: The environmental impact of crypto mining has been a prevalent criticism of the sector and 2024 might be the year that starts to change. Projects focused on eco-friendly solutions and sustainable blockchain practices are likely to gain popularity, addressing concerns and helping to shape a greener future for the crypto space. In tandem, we are already seeing an increasing number of carbon tech projects being built on underlying blockchain solutions.
- DeFi: Decentralized Finance (“DeFi”) will advance. Expect innovative DeFi projects to emerge, pushing the boundaries of what’s previously been possible. Smart contracts will become even smarter, offering users more control over their financial activities without relying on active participants .
- NFTs Advance into New Areas: Non-Fungible Tokens (“NFTs”) won’t just be for digital art and collectibles and their use will spread to numerous industries, from real estate to gaming. The concept of tokenizing real-world assets will gain more traction, opening new opportunities for investors and creators.
- Regulatory Landscape: Governments are catching up with crypto, and whilst the EU is better than many others, increased regulations are on the horizon. While some fear stifling innovation, we (perhaps inevitably as lawyers) see regulations as a necessary step for widespread acceptance. There is however a delicate balance for governments, between embracing the future and maintaining control.
The integration of crypto into mainstream traditional funds is a paradigm shift and promises increased access, along with a stamp of legitimacy. As the crypto sector evolves, commitment to compliance will be vital in maintaining that, whilst capitalising on the breadth of opportunities.
As ever with the crypto industry, there is always uncertainty in the landscape and some further bumps in the road are unavoidable. Either way, change during 2024 is inevitable.
May the games begin.
For further information in relation to this article, please contact partner Andrew Tzialli.