Cryptocurrencies will emerge from its ‘winter’, and with better prospects

Amidst fear, uncertainty and doubt (FUD as it is commonly called in the cryptocurrency world), we have seen various cryptocurrencies (including Stablecoins such as Luna) take a nosedive in the last few months. Rising interest rates and surging inflation haven’t helped the course either. While we are indeed entering a crypto winter, all is not lost. We see three clear winds of change emerge over the next 6-12 months.

Wave 1

Reduction in regulatory arbitrage/blind spots: Regulators will no longer be on the fence and will take stances based on their individual risk appetites. Regulators who are pro-cryptocurrencies will prioritize risks and look to eliminate any regulatory arbitrage/blind spots to ensure transparency, financial stability, and consumer protection.

Wave 2

Continued growth of Central Bank Digital Currencies (CBDCs): Central banks have gained greater interest to adopt fiat-backed cryptocurrencies (e.g., for cross-border transactions and future payment systems). CBDC evolution is inevitable. This is because of the multi-faceted benefits associated with CBDCs:

Faster, cheaper transactions: CBDCs can lower the costs and increase the speed of transferring money primarily by removing intermediaries through decentralized channel.

Broadening of tax base: CBDCs enable relevant authorities to better monitor money laundering and illicit transactions, consequently broadening the tax base.

Financial stability: CBDCs would allow central banks to exert monetary policy in a much more direct way, and insure CBs against the disruption from other payment tokens.

Financial inclusion: CBDCs can potentially make financial services available to the unbanked and underbanked by facilitating alternative financial services and products.

Needless to say, 90 countries (led by their Central banks) representing over 90 per cent of global GDP, are exploring a CBDC solution. We expect more mainstream CBDCs in the next 6-12 months.

Wave 3

Co-existence of cryptocurrencies with other payments instruments: Future of cryptocurrencies will comprise a combination of centralized, decentralized, account-based and token-based currencies. Furthermore, CBDCs, stablecoins and other crypto currencies will likely co-exist with traditional digital and physical currencies. This will ensure optionalities for end-users (retail as well as corporate).

In conclusion, cryptocurrencies will come out of the winter. However, the future will entail appropriate regulatory interventions (and controls) combined with proliferation of CBDCs which will become mainstream. Cryptocurrencies of future will co-exist with traditional digital and physical currencies.