A recent poll of 150 portfolio companies found that the crypto industry is alive and well, with four out of five polled saying the value of their business has increased in 2020.
The State of Crypto 2020 survey by DCG Founders finds that half the respondents outperformed against expectations this year. Digital Currency Group (DCG) is a venture capital group invested in a range of crypto and blockchain companies, and recently acquired SA crypto pioneer exchange Luno.
“In emerging markets (EMs), across Africa, the Middle East and South America, signs of a global economic slowdown exacerbated fears of local currency devaluations and capital controls – prompting many to look to cryptocurrency as a haven for their savings,” says the DCG report.
Net profits in five EM-focused exchanges examined improved 80% between the fourth quarter of 2019 and the second quarter of 2020.
Local currencies shunned
In countries such as Argentina, investing in dollars has become a national habit because of the steady depreciation of the peso. The same dynamics are at play in Africa, particularly in countries like Zimbabwe where local currencies are shunned by those with the resources to externalise their funds.
Luno co-founder Marcus Swanepoel, speaking via webinar last week on the future of crypto in Africa, pointed to the attraction of a low-cost digital asset transfer system. Africa-destined remittances totalled $40 billion in 2019, with 10% of that going in fees.
African e-commerce transactions exceeded $30 billion last year, with fees of $1 billion.
“These fees don’t seem like a lot when you do it once but they add up over time,” he said. “If you take away capital controls, it’s been shown that this could increase GDP by 1% to 2% in some African countries and stimulate inter-African trade.”
Regulation back in focus
While regulation was once seen as an existential threat to the crypto industry, now it is seen as merely an “impediment to sustainable growth,” says the DCG survey. Many executives welcome regulatory clarity and consistency – over no regulation or deregulation.
“It’s really important that we start to see some consistency and coordination across regions,” said Simone Maini, CEO of Elliptic, a blockchain forensics and analysis company. “There are still plenty of opportunities for regulatory arbitrage at the moment, where businesses are trying to operate in jurisdictions with looser regulations.” She believes harmonised rules across geographies would support institutional crypto adoption.
An issue that has alarmed some is the so-called FATF Travel Rule proposed by global money laundering and terrorist financing watchdog the Financial Action Task Force (FATF) – which could extend KYC (Know Your Customer) requirements applicable in traditional financial transactions to virtual asset service providers (Vasps) such as crypto exchanges.
Many in the industry see this as regulatory overreach, and a threat to crypto’s promise of financial autonomy.
Stablecoins take off
Stablecoins are crypto’s answer to evaporating fiat currency value. These are digital assets backed by a reserve asset, and are arguably the fastest-growing decentralised finance (DeFi) subset. USDC, the dominant compliant digital dollar stablecoin, has grown in circulation from about $400 million in early 2020 to more than $2.8 billion today.
Digital asset exchanges and payment companies have benefitted from of surging stablecoin volumes.
“USDC rapidly became the most popular asset on our platform behind Bitcoin,” stated Sebastian Serrano, CEO of Ripio, an Argentinian digital asset exchange and payments company. “The growing demand for stablecoins in Latin America, and Argentina specifically, is due to the fact that buying dollars as a form of savings is a regular monthly habit for middle-class Argentinians, due to cyclical devaluations and loss of trust and credibility in the Argentinian peso.”
The three dominant stablecoins are USDT, USDC (both linked to the US dollar) and Pax (linked to gold).
Executives polled in the DCG survey view stablecoin growth as a constructive step on the path to mass adoption. “In attracting new audiences who psychologically accept ‘digital money’ more readily than ‘decentralised currencies’, stablecoins can play an onboarding role for the wider industry.”
What macro developments will have the greatest impact on digit currency adoption?
Fears of the global recession, inflation and the hunt for yield are the three drivers most likely to prompt wider adoption of digital assets.
Institutional investors have increased their overall allocation to digital assets in 2020.
“Grayscale and other digital currency asset managers have seen substantial capital inflows. In the third quarter of 2020, Grayscale raised approximately $1 billion, more than 1.5 x the capital it raised throughout 2019, and 84% of inflows came from institutional investors,” reads the report.
Big business is buying
Another form of ‘smart money’ entering crypto is large enterprises. This was recently in the spotlight when Square announced a $50 million investment off its balance sheet into bitcoin. Decisions to allocate a portion of corporate treasuries to crypto assets reflect the key adoption driver DCG foresees: with interest rates near zero and inflation fears rising, treasurers’ mandate is to look for alternative cash repositories to preserve purchasing power.
So will the price of bitcoin go up or down?
There’s no doubt among those who were surveyed. Only 9% of expect a lower bitcoin price from current levels within the next six to 12 months. Roughly half expect a price of $10-$15 000 over this period, and nearly a quarter believe it could go as high as $20 000.