EXCLUSIVE: “When the ‘enfant terrible’ of finance becomes the adult in the room” – Chris Tyrer, Fidelity Digital Assets Europe, Stephen Richardson, Fireblocks and Bitstamp in ‘The Fintech Magazine’
The wild child of finance is finally being taken seriously by the adults… the institutions and regulators who dismissed and ignored it, have come to realise that crypto was a prodigy they mis-took for a delinquent. Three leading members of the altfi economy came together recently to discuss what maturity looks like.
Few innovations in finance have proven as consistently polarising as cryptocurrencies. A quick browse of the internet’s top crypto headlines covers everything from ‘crypto muggings’ on the streets of London to positive pieces about crypto powering businesses across the economically isolated Cuban economy.
So many different claims have been levelled at the crypto sector that it can be hard to establish where the industry is even headed. The rise and recent apparent cooling of blockchain-assisted NFT art is a good reminder of what hype can do to a viable technology innovation, and the unravelling of Facebook’s Libra/Diem coin ambition shows us that even the largest and most well-funded companies may find success hard to come by.
But, for every famous crash-landing of a crypto initiative, there are another dozen ideas for where the technology could be transformational, from blockchain-assisted democracy (the Crypto-Voting project in Europe), to an Ethereum based Global Universal Income (GLO) coin. Due to launch later this year, GLO promises to provide a basic income of $1 a day to anyone in the world who applies for it, but crucially to those in extreme poverty, living on less than $1.90/day.
Cryptocurrencies have reached an inflection point. After being viewed for more than a decade as the preserve of ideological geeks and internet criminals – simply a way to pursue futurist crusades or to launder money – it is finally shedding its outsider status. This transformation is due to the continued zeal of crypto’s early enthusiasts now being bolstered by two new user groups: institutional actors keen to profit from it – or at least explore how they might – and an ever-expanding cast of crypto-focussed companies pushing the boundaries of what this tech can do. The latter includes exchanges, infrastructure providers and digital asset managers. Among them are Bitstamp, Futureblocks and Fidelity Digital Assets and this is where they think it will go next…
“We’re pushing through all-time highs,” says Chris Tyrer, Head of Fidelity Digital Assets Europe, the enterprise-class crypto investment option for clients of Fidelity who don’t wish to hold digital assets directly. “It was very easy for institutions to dismiss this as some kind of bubble in 2017. But bubbles don’t tend to reinflate.”
Five years on and 2020, he says, marked the moment that crypto really proved its value – when there was talk of investors using Bitcoin (then breaking the ceiling at nearly $30,000/BTC) as an inflationary hedge in the face of falling returns on government bonds.
“It was the seminal moment when we started to see a lot of mainstream investors approach us,” recalls Tyrer, “[although] less actively taking positions, but more on an education journey.”
In November that year PayPal also |made a symbolic move by opening its payment network to Bitcoin and other cryptocurrencies. It was something of a vindication for crypto proponents who’d been convinced that it would eventually replace fiat currency as the primary means of exchange (be it physical or digital), although there was limited evidence for that beyond the ability to buy a Matambrito Subway sandwich with Bitcoin in Buenos Aires.
And then, last year, came what Tyrer calls the big crypto ‘rebrand’.
“Twelve months ago, people weren’t really talking about the metaverse, they weren’t talking about Web 3.0, creator economies. That all shifted at the tail end of last year when Facebook changed its parent company name to Meta,” he says. “We’re in a situation now where the use case for these assets, this whole ecosystem, has really solidified the investment thesis in a lot of people’s minds.
“At the beginning of last year, the interest in our products and services was still quite correlated to price. If the market went up, people couldn’t get on the platform quick enough. When the market came off – and I don’t mean by two or three per cent but by 30 per cent – things started to slow down.
“This year has just been completely different because, I think, the penny has finally dropped. It feels like people finally understand what all this is for.”
Stephen Richardson, head of APAC and VP of product strategy and business solutions at Fireblocks, a secure digital asset infrastructure company, giving more than 1,000 institutional players the ability to directly hold and custody their own crypto assets, agrees that the past five years have seen seismic change.
“And whether they’re payments platforms or fintech financial institutions, it’s been easier to get into this space and offer a strong digital product to consumers,” he says.
The influx has led to more serious marketing and promotional activities, and a far higher profile for the crypto industry as a whole. Richardson points to NBA and NFL stars Steph Curry and Tom Brady’s tie-up with crypto exchange FTX as an example.
“I think that makes a huge difference in what we’re seeing today,” he says. Fireblocks’ own infrastructure APIs have contributed to this new economy by making it easier to deploy the technology needed to thrive in this space, changing the way the industry works, and making it more salient for institutional investors.
“Once you’ve really settled that infrastructure problem, then it becomes more of a product and a customer acquisition play,” says Richardson.
Julian Sawyer, who was until recently CEO at Bitstamp, one of the longest established crypto exchanges, has observed all of these changes and says there has been another notable shift recently: its customer base is diversifying away from trailblazer Bitcoin.
“Twenty-five per cent of Bitstamp’s customers, who are 20 years and younger, have never bought Bitcoin. 2022, is about Bitcoin and other crypto assets.”
Some of that investment, certainly at the beginning of this year, was being redirected to NFTs in Tyrer’s view: “That has taken a lot of the speculative retail volume away from the sort of traditional blue-chip cryptocurrencies,” he says. But, as they all agree, this is no longer about individual retail investors playing on the fringes of finance.
“It has moved from pure exchanges, like Bitstamp, to other fintech providers,” says Sawyer. “So, Bitstamp launched Bitstamp-as-a-Service [initially in Europe and extended to North and South America in 2022], which enables a white labelled solution. Other people are doing something similar and that starts to get crypto into the everyday language, which is super important. So, you can buy your stocks, your shares, your crypto, make FX payments, etc. That means it’s no longer a discrete market segment ‘over there’. It’s in the financial services world; it’s how I’m managing my money and my investments.”
As crypto clearly isn’t going away, most regulators have had to engage with it (certainly in Western economies), and most legitimate crypto exchanges want to be seen to be regulated to give them the credibility they need to work with organisations in the mainstream financial system, including banks.
“Regulation provides protection, and direction of travel, for institutions to be able to engage in this market,” says Sawyer.
That said, what’s lacking is international consensus on the approach. In China, the central bank banned cryptocurrency transactions in late 2021; Uganda and Argentina followed suit this year. Since 2018, the EU has been trying to thrash out the Markets In Crypto Assets framework to ensure that any regulation is adequate and agile enough to cope with new and changing asset natures. Europe’s individual monetary authorities nevertheless are still jittery: as recently as last month, Spain’s Central Bank released a report, warning of ‘systemic risks’ inherent in crypto being more closely aligned with the traditional economy. But Sawyer would see that as an unstoppable trend; to be welcomed, in fact.
“We’re seeing lots of traditional financial services businesses using blockchain to do things in their day-to-day,” he says. “Five years ago this project was sitting in the IT department, in the basement… Now we’re seeing it headed up by the P&L functions within the financial institutions. They’re clearly seeing opportunities about how to invest.”
Fireblocks’ Stephen Richardson agrees: “The idea of a corporate treasurer at Exxon, or BP looking at an asset class that sits outside of all the technology infrastructure that they have on a daily basis to manage cash P&L would have been borderline impossible. But now you’re seeing providers saying, ‘we anticipate folks will be putting Bitcoin and other assets on balance sheets. Now we’re building technology to make it easier for them to do so’. That change, for digital assets to become a part of everyday business use cases, is a big shift. Providers, like Fidelity, and custodians, are doing the broader integration work, on the other side, to make sure that everything is well aligned, and working seamlessly.”
In his opinion, stablecoins will release the dam that’s been holding institutions back from embracing crypto as part of their day-to-day business operations. He points to ANZ Bank in Australia issuing a stablecoin to enable payments between one of its big clients and a wealth management firm specialising in digital assets called Zerocap earlier this year.
“Banks are looking at the use cases that they feel will enable their customers to engage in this new asset class, reduce cost, and add broader value,” says Richardson. “The crypto-native market has solidified some of the use cases that these banks were relatively sceptical about. The idea of stablecoins as a mechanism to enable DVP settlement was something that came out of the crypto space with the proliferation of USDC, USDP, and Tether. And that makes a huge difference, in terms of businesses able to use those assets, and the value that we’ve been able to drive there.
“Banks are watching and trying to understand how they use their scale and competitive advantage, to be able to do that. Tokenised commercial bank money represents a really interesting way for them to achieve it.”
There’s been a rush of banks strengthening their own crypto asset teams over the past few years. In fact, many, like BlackRock, have had internal working groups for a decade, although they’ve often been driven by individuals with a personal interest, not a strategic plan. Sawyer still detects a marked reluctance by many banks to fully engage with the crypto economy.
“I think people have generally been a little bit disappointed by how quickly banks have entered the space. In terms of the traditional services that banks would provide, there are very few offering a full suite of services around crypto,” he observes.
One reason for this is continuing squeamishness around the thorny issue of regulation. Investment banks have been wary of indulging in under-regulated investment markets since the Global Financial Crisis. Which is why Sawyer thinks Europe’s crypto-specific MiCA legal framework, adopted by the European Parliament this year, is a major step forward.
“I think that is going to be the spark that lights the fire and kicks off a fresh wave of development and activity in the space for financial intermediaries,” he says.
If extreme crypto visionaries see it wiping fiat currencies off the map, decentralising and anonymising the global flow of finance, they might be disappointed by the consensus forming among these three players: that fiat and cryptocurrencies will co-exist happily for some time to come.
“In the past, it’s been, ‘us versus traditional financial services’. That’s something I don’t buy into,” says Sawyer. “Yes, it’s going to be big, but all the other financial services will continue to play a role.”
It’s important, he says, that crypto businesses like Bitstamp are recognised as having earned the right to be there.
“It is a regulated business,” he says, “with bank-grade, AML, KYC, KYT. An exchange like Bitstamp, or Coinbase, or Kraken, or a large institution like Fidelity, won’t risk licences to launder crypto. It doesn’t make practical business sense,” chimes Richardson. “When we talk to compliance officers, show them where the transactions came from, the wallet structure, the risk rating, the score, they’re amazed by the comprehensiveness of the tools that are in the space today.”
Tyrer for one is tired of defending the industry against negative headlines that, in his view, rarely reflect the true status of the industry. He’d prefer to focus on recent developments that will allow crypto to play an increasingly supportive role in global finance and fulfil its original intent – to democratise finance, extend investment opportunities, and allow ordinary people to escape the kind of monetary tyranny that leads to hyper inflation.
“We’re starting to see a viable alternative to local fiat currency. So, if you see irresponsible central bank policies, if you see mass money printing, if you see rampant inflation and devaluation of your local currency, there is an escape hatch now.”