In developed countries, we don’t think twice about the access we have to banking services, the (relative) ease with which we can send and receive payments and the plethora of financial return products available to us.
Those of us who have lived in countries that have suffered the ravages of hyperinflation, exchange controls or where large portions of the population remain unbanked, understand how unequal the financial playing field is for ordinary people. How having access to credit cards, wealth management products, high interest earning accounts are reserved for those who have money. On top of that, intermediaries stand in the middle charging high fees because they can and the financial industry is riddled with inefficiencies and opacity.
Enter the Cryptoeconomy and DeFi
Crypto is the great equaliser. It allows for anyone with access to a mobile or computing device to have access to financial freedom regardless of class, location or economic status. It allows a tailor in India to get paid for his work just as easily as a lawyer in New York does for hers, regardless of whether they have a bank account. It allows a domestic worker in Dubai to send money back to their family in the Philippines without being charged exorbitant commission by intermediaries.
So what is crypto? A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralised networks based on blockchain technology which is a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
The crypto economy is here to stay and we are reaching the point of no return, no matter how much governments, regulators, corporates and banks kick and scream. The rise of crypto has parallels to the rise of the Internet in the 1990s in terms of mass-scale adoption:
At Nuance, we believe crypto & blockchain will become more mainstream as a form of trade, payments, exchange globally and we are at the beginning of a inflection point with global crypto users expected to grow 80% p.a. in the next 3 years reaching 1 billion users by 2024 and 3.7 billion by 2030. Clear evidence that crypto is becoming mainstream is emerging every day by early institutional adoption from the likes of Microsoft, Starbucks, Paypal, Square, Tesla and being piloted currently by Amazon and Visa. Robinhood, the retail trading app, recently announced financial results in its IPO prospectus, many analysts were surprised that so much revenue came from retail investors trading dogecoin and it has just announced the launch of cryptocurrency wallets as digital assets become a bigger part of its business. Large banks are still resisting given the obvious threat to their business (lower transaction fees!) but the progressive ones are realising it’s a futile battle to fight and are joining forces with crypto businesses instead, helping launch DeFi (decentralised finance) products such as crypto credit cards, lending services, etc to their customers. Financial products available through DeFi are not only available to everyone, they are superior to traditional finance products. For example, Compound Treasury, a borrowing and lending protocol created by Compound Labs, offers a 4.0% fixed return with immediate liquidity. Compare that to the 0.25% — 0.50% interest rate for traditional savings accounts. An astronomical difference. While adoption from banks has lagged, Fintech companies have taken notice and are building countless applications to unlock DeFi for the masses. It won’t be long before banks follow in their footsteps. Whichever statistic you analyse, the growth of crypto is unstoppable. One yardstick of activity is the value of digital instruments being used as collateral: from almost nothing in early 2018 it has reached $90 billion. Another is the value of transactions that Ethereum is verifying. In the second quarter this reached $2.5 trillion, around the same sum as Visa processes and equivalent to a sixth of the activity on the Nasdaq.
Power to the People
The biggest global market to benefit from the rise of crypto and DeFi products is the unbanked population which totals 1.7 billion.
And even more importantly, the majority of the unbanked are underrepresented communities who are unjustly restricted from jobs, property, justice and credit in many countries. We see the cryptoeconomy as a massive positive force bringing economic opportunity and equality for underrepresented communities globally.
Distributed ledger technology finally allows us to rid all barriers of entry associated with bank account ownership. People no longer require someone else to be their bank, they can be their own bank.
Fear and the Skeptics
With the birth of any new groundbreaking disruption, you have non-believers, skeptics and detractors, often with their own agendas. Two primary concerns given by these crypto skeptics have been criminal / illicit activity and impact on the environment.
But let’s look at the hard numbers:
Criminal & illicit activity
Although initially cryptocurrencies were seen as a haven for illicit activity, the amount of activity is falling drastically. According to Chainalysis, a leading crypto forensics firm, illicit activity represented 0.34% of cryptocurrency transaction volume in 2020, down from 2.1% in 2019.
Meanwhile, estimates of illicit activity in the economy as a whole, overwhelmingly conducted through traditional financial intermediaries and with traditional fiat currencies, are on the order of 2 to 4 percent of global GDP.
A 2020 BAE Systems report, commissioned by SWIFT, further noted that “identified cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods”.
Impact on the Environment
According to a study conducted by Galaxy Digital (2021), the Bitcoin network consumes an estimated ~113.89 TWh/year in total. To help contextualise this number, there are a few points to consider:
The global annual energy consumption is ~116071 TWh/year, 1458.2x that of the Bitcoin network.
The global annual electricity generation is ~26730TWh/year, 234.8x that of the Bitcoin network based on World Bank and IEA estimates.
The energy footprint of “always-on” electrical devices in United States’ households is ~1375 TWh/year. When combined, this energy consumption can power the Bitcoin network for approximately 1.9 years.
Galaxy Digital reported that the total greenhouse gas (GHG) emission derived from the Gold mining industry is estimated at 100,408,508 (t CO2e), converting to approximately 240.61 TWh/year. While the banking system (using banking data centres, bank branches, ATMs and card network’s data centres as areas of electricity consumption) is powered using approximately 238.92 TWh/year of electricity.
Note while it’s clear some improvements can be made to Bitcoin’s energy efficiency, it’s only one part of the cryptoeconomy. Currently 90–95% of all blockchains are now running off proof-of-stake consensus mechanisms, drastically reducing the energy usage per transaction. We expect this trend to continue as the technology improves and iterates. A core part of crypto’s DNA is its ability to innovate, but the media present it as if it’s all one thing and ignore the nuances and the ability to change. The Upshot
Any new paradigm and disruptive force does not come without its risks. We are seeing news every day of governments or regulators clamping down on crypto-related businesses (e.g. China) but also other countries ready to embrace it (e.g. Indonesia).But what’s undeniable is that whatever kicking and screaming these various stakeholders make, the world will not be able to stop the inevitable rise of the cryptoeconomy due to the power of decentralisation — just as we couldn’t stop the rise of the Internet three decades ago. And despite any early adoption teething issues the system faces now, in the long run it will help bring financial inclusion and economic freedom to the excluded or overlooked — and that is why crypto matters.