SFF GREEN SHOOTS SERIES: CRYPTOCURRENCY
Sep 10, 2020
On 21 August 2020, we were joined by three luminaries in the cryptocurrency world, Dante Disparte (Libra Association), Mike Kayamori (Liquid) and Tyler Winklevoss (Gemini). Diving into a spirited discussion on the future of the crypto space, our speakers discussed areas including:
- As the crypto space evolves, will we see stiffer competition or greater consolidation amongst the cryptocurrencies? Will the next generation of cryptocurrencies render fiat currency redundant?
- Can stablecoins integrate more with the existing payment ecosystem? Will they?
- Regulation of digital currencies across different jurisdictions are still maturing. What should regulators do to keep pace with innovations in cryptocurrencies? How should dealers and exchanges navigate the international regulatory landscape in the meantime?
- Q&A with Speakers: below
- We ran a poll during the session. Results below!
- Watch a replay of the session on our YouTube channel here. Do follow our channel Singapore FinTech Festival for more videos.
- Want more? Check out upcoming Green Shoots sessions and SFF Roadshows on our website here.
- SFF x SWITCH 2020 returns on 7-11 December. More here.
Q&A with Speakers
Question: What are your thoughts on digital gold and gold-backed stablecoins?
Response: Dante Disparte - Why not! The tokenization of physical assets while creating opportunities for fractional ownership is a compelling aspect of blockchain and crypto projects. The key challenge of course is to manage potential liquidity and trust issues if there are challenges in verifying the reliability, safety and security of underlying assets. We must also be very thoughtful about the expected utility (e.g. as a payment instrument, security, etc.) of a digital asset, so that users are not faced with “spenders’ remorse” that has plagued early adopters in the sector who did not fully understand the economic behavior of the crypto-assets they were using.
Response: Tyler Winklevoss - I’m a fan. Gold is an important store of value asset with a multi-millennia track record. Giving it more crypto-like characteristics and increasing access to it is a good thing.
Question: What has the industry achieved in terms of simplifying the ownership and storage of crypto-currencies in order to increase ownership and utility for day-to-day transactions?
Response: Dante Disparte - When it comes to payments and money it is clear the direction of travel in both the public and private sectors is digital. In the last decade, of which 5 years have marked a serious point of maturity among digital wallet providers and custodians, a lot has been achieved when it comes to minimum operating standards, consumer protection and beginning to harmonize regulatory treatment and requirements in different jurisdictions around the world. There’s still much work to be done, but the sector is clearly coming of age.
Response: Tyler Winklevoss - I bought some of my first bitcoin on Mt. Gox. It was a scary experience. In response to this, I built Gemini to create a simple, reliable, and secure way to buy, sell, and store crypto. Today, you can sign up to Gemini in under 2 minutes, add your debit card and instantly buy crypto. You can safely keep your crypto on Gemini or use Gemini Pay to spend your crypto at over 30,000 brick and mortar retail stores in the United States. I’d call that progress.
Question: A lot of the business success of crypto exchanges to date was based on a very light regulatory environment. As regulators are starting to demand greater compliance with traditional finance markets’ requirements and therefore increasing costs for exchanges, where do you see profitable innovation coming in your business?
Response: Dante Disparte - Undoubtedly the early days in crypto were marked by some degree of regulatory arbitrage, as the sector sought (and continues to seek) regulatory clarity. The first movers in terms of jurisdictions, were often technology forward regulators that have market wide oversight of financial services innovations in their countries and could see that blockchain-based business models are opportunities and not threats. This paradigm is now starting to take shape in large economies around the world, which will hopefully create the necessary regulatory clarity and operating norms to spur further development and market adoption. The key however is for regulators to meaningfully abide by a tech-neutral, activity based approach to rulemaking, which espouses the concept of “same risk, same rules,” but does not penalize innovators.
Response: Tyler Winklevoss - The largest and healthiest financial markets in the world are those that are thoughtfully regulated. At Gemini, we believe that the same will be true for crypto markets over the long-term. Crypto companies that enter regulatory regimes that foster both consumer protection and innovation, such as the one proposed by MAS, will have the greatest opportunity. Greater compliance has a cost, but it also has the potential to bring much greater market participants.
Question: Given that holding stablecoins/CBDCs in a wallet may not pay interest, would such 'currency equivalents' only work as a 'last leg' of payment, since there are economic incentives to keep money in an area which pays you interest? Following from that, will then a ZIRP or NIRP then be more or less effective if there are alternatives to keeping 'money' in a deposit account?
Response: Dante Disparte - A stablecoin designed as a payment instrument has its closest analog in cash and not in interest-bearing instruments like deposits or other types of banking solutions. How wallet providers, banks and other developers in this ecosystem evolve and differentiate their solutions and respective market offerings is yet to be seen.
Response: Tyler Winklevoss - Fiat currency or any similar assets like stablecoins/CBDCS are designed to be mediums of exchange and meant to be spent/used. Perhaps you may save less in a bank today given the zero to negative interest rate environment around the world, however, in general if you are looking to optimize your wealth creation, cash will always be a small percentage of your portfolio even in a higher interest rate environment.
Question: How do you think yield farming will affect the crypto space?
Response: Tyler Winklevoss - It already has and will continue to have a dramatic effect on the crypto space. Your bank provides zero to negative interest rates, yield farming can conservatively provide positive, high single-digit and even double-digit returns on your capital. There are real risks, and as always caveat emptor, but a new gold rush is underway. The DeFi revolution is upon us.
Question: There is a great focus on crypto as a payment solution. But finance is a lot more than payments. Do you see any interest currently from corporates to issue bonds denominated in crypto, building on from the World Bank Bond-i issued a while ago?
Response: Dante Disparte - Indeed, looking at the “capital stack,” there are a range of future solutions where blockchain-based money flows can be difference makers. From bond issuance, for which the World Bank Group and others have broken new ground, to parameterized insurance claim payments, the key is to create networks that support programmability in money flows, thereafter the opportunities to remove friction across a wide spectrum of financial services seems endless.
Response: Tyler Winklevoss - Yes. I believe corporate bonds and stocks will be issued on blockchains and be tradeable on centralized and decentralized exchanges for any other crypto asset in the world that someone else is willing to pay or accept for them.
Question: There has been a lot of hype over DeFi lately. Do you think we will get there?
Response: Tyler Winklevoss - I think we are on our way and unlike the 2017 ICO craze, DeFi is living up to the hype, it’s actually already working in the wild, it’s not just a bunch of white papers.
Question: The more secure a blockchain system is, the harder it is to scale. Therefore, how do you think it can balance between security and scalability?
Response: Dante Disparte - As a design principle, security and scalability are not trade-offs in blockchain-based systems, but rather equal priorities. On the issue of security, too much of the world’s financial infrastructure relies on dated “single point of failure” constructs, such as honey pot databases that imperil people’s privacy and financial records, to low levels of cybersecurity defense with many points of vulnerability. Blockchain-based systems, by design, can produce marked improvements in resilience and business model continuity, especially when the benefit from decentralized structure or the collective defense of node operators. Gains in scalability and transaction throughput – to rival peer services – are a function other system designs, but in short the technology is there.
Response: Tyler Winklevoss - The security of many crypto networks actually scales in perfect step with the price of their native assets. The real trade-off is between decentralization and scalability. The Ethereum network has some interesting ideas on its roadmap to tackle scalability yet remain decentralized.
Question: Should cryptos' main function or contribution to society be a digital store of value or a digital medium of exchange?
Response: Dante Disparte - If data is the new oil or the world’s first limitless asset, is blockchain the new barrel? It would seem the opportunities as a store of value and a medium of exchange are but the first examples where crypto is being applied. The bigger societal impact may be to unlock self-sovereign identify and a rights-based approach to accessing people’s information and permanently recording the objects of value they have title too – e.g. land registries, digital identity, among others. The next decade of evolution in this space will start to see meaningful developments in these areas.
Response: Tyler Winklevoss -There are cryptos that already fulfil these roles. Bitcoin is an emergent store of value, whereas stablecoins like Dai, GUSD, or proposed Libra are mediums of exchange. This is similar to how gold and fiat currency play these different roles in the legacy financial system.
Question: The Central Banks are asking for Universal Access and Offline payments which is meant to be provided by hardware wallets in the form of cards. Is Libra considering issues of Universal Access, especially if you are targeting emerging markets?
Response: Dante Disparte - Universal access to payment systems is a vital need at the national, regional and global levels. In addition to spurring responsible innovations supporting faster peer-to-peer payments (for example remittances, among others), an open source technology standard based on blockchain is liable to introduce innovations downstream of the payment system and in adjacent areas, such as authentication, e-KYC, digital identity and offline payments, among others. This would include opportunities in “last-mile” settings, where internet reliability is an issue, as much as other prerequisites may be scarce. Digital payment systems and cryptocurrencies are not meant to be substitutes for fiat currencies and physical payment solutions (which are as timeless as our species’ need to truck and barter), rather they are complements.
Question: For any currency, the value of utility is important. Over the next decade, which top 5 areas do you expect crypto to be used for spending in daily life?
Response: Dante Disparte - When we stop talking about blockchain we can change the world with it. True of past waves of breakthrough innovation and the emergence of foundational technologies like the internet, the next decade will mark a period where the hardware, software and “magic” fades to the background and the outcomes are what matters. Look for the current voids in the market and you will find the areas of development and opportunity over the next decade. For example, we do not have an “always on” real-time payment network that supports peer-to-peer payments at scale. Markets do not sleep, many of you do not sleep, but your money and financial systems do. This type of network should exist. There should be broader opportunities for open, vigorously competitive fintech and regtech innovation, much in the same way the internet as a low-friction information sharing protocol spurred a wave of app-layer developments, the advent of low-friction universal value-transfer protocols can unlock a wave of financial breakthroughs. These breakthroughs are on the horizon and they will bridge public-private collaboration. Open source principles should apply.
Response: Tyler Winklevoss - In the future you will be able to live on crypto and in crypto. You will be able to protect the value of your wealth through emergent store of values like bitcoin, you will be able to spend crytpo via stablecoins, and you will be able to invest via cryptos that are securities, derivatives, art, collectibles, and more. Every financial and economic behaviour you execute today outside of crypto, you will be able to do inside of crypto in the future.
Question: On regulation, could you share your thoughts on the FATF travel rule and how you think it will play out given that its repercussions are quite huge?
Response: Dante Disparte - If you believe in a principled regulatory approach that espouses technology neutrality focusing on the financial activities being carried out, than FATF recommendation 16 is an important step in ensuring the use of crypto as a payment instrument conforms to applicable rules. Indeed, on the score of protecting the financial system from illicit activities, money laundering and terrorism financing, among others, the advent of blockchain-based payment systems and the suite of track and trace technologies that can follow illicit money flows in real time, represent a step-change improvement in compliance with AML, CFT and other frameworks. Collectively, the adoption of these systems can remove the “penalty on poverty” that current de-risking regimes exact from many regions around the world.
Response: Tyler Winklevoss - I believe that licensed exchanges can and will be able to comply with it. This is not a new or double standard, but rather the existing standard in the fait banking system that regulated crypto exchanges will now have to adopt. The promise of crypto is not anti-money laundering activity and other illicit activity, therefore, I don’t think rules like FATF that combat bad activity, will hurt the trajectory of crypto, but rather they will help it.
Question: When do we expect crypto price volatility to smooth out? This has a huge impact on its appeal as a store of value.
Response: Dante Disparte - The thaw of “cryptowinter” has taken some time and removed some truly “unstable stablecoins” from circulation courtesy of the initial coin offering (ICO) bubble bursting. While this can be viewed as a market correction, there is also an acknowledgement among market participants that the asset class is here to stay and in bitcoin’s case, may be a form of uncorrelated risk and returns – possibly even a hedge against underlying volatility.
Response: Tyler Winklevoss - For those who want low-volatility crypto to spend or earn, you can already use stablecoins. If you’re looking for investment returns, then similar to non-crypto assets, you will have to get comfortable with risk and volatility. There is no such thing in finance as returns without risk. Today, bitcoin is an emergent store of value, which means it is more volatile but also has more upside. I’ve already made the case for $500K bitcoin, which would be a 45x return from here. When bitcoin reaches this value, it will be a more mature store of value and less volatile, but it may also have less potential upside.
Question: Do you see a threat to the mass adoption of cryptocurrencies coming from existing remittance companies, especially if they are able to offer cross border transactions at a reasonable price to most countries?
Response: Dante Disparte - The goal is not the “mass adoption of crypto,” but rather a more equitable and complete financial system that improves optionality, reduces costs and onboards billions of people who are unbanked or underbanked. The reality today, especially in most remittance corridors, is that there is very little competition and people on both ends of the transaction are relegated to high fees (7% on average globally with a wide price dispersion), slow outcomes and physical sending and receiving options – which in a pandemic calling for quarantines imperils public health. The lack of optionality is a major pre-pandemic point of vulnerability, which digital payment innovations aim to address.
Response: Tyler Winklevoss - Crypto is trying to solve for the shortcomings of the current system. Ultimately, I think crypto will solve these issues before the legacy system does. Crypto has ability to create greater choice, independence, and opportunity for people around the world in a way that the existing system never has and arguably never can.
Question: I agree that there needs to be better infrastructure for crypto users and institutions, not just hardware. Is there a need for a greater push for infrastructure services like third party custodian and electronic KYC-ID?
Response: Dante Disparte - Broadly speaking, to unlock the full promise of online commerce, including the case for low-friction, high-security user-directed payments, the need for digitally native forms of identification and authentication (that are privacy preserving) is the next frontier. Catalyzing the development of digital identity and authentication solutions can produce real breakthroughs in unlocking stranded assets (such as land rights) and extending the perimeter of the formal economy to includes billions of people who are on the margins.
Response: Tyler Winklevoss - We’ve been working hard at Gemini to make it simple and secure for you and everyone around the world to buy, store, and engage with crypto. We believe that trustworthy infrastructure that is user-friendly is critical to wider adoption. I bought some of my first bitcoin on Mt. Gox and that experience told me exactly what needed to change. My response has been to build Gemini for the last 6 years.
Question: If it is as easily used as emails, will crypto or stable coin infrastructure suffer from the same hacking risks? Losing an email won't be the same as losing value.
Response: Dante Disparte - While it is true that the asset class produces a series of unique risks, as with email or other systems, one part of the challenge emerges between the proverbial keyboard and the chair, the other is a function of the combination of security measures from the provider to the endpoint. As a general matter, however, many of the native design features of blockchain-based systems represent quantum leaps in terms of resilience, operational redundancy and other areas. How wallet operators enhance security, consumer protection and fiduciary obligations among others, will not only be the basis of ongoing regulatory harmonization, but the basis of their competitive differentiation.
Response: Tyler Winklevoss - I don’t believe ease of use and security are mutually exclusive. By using trustworthy email providers like Gmail and security measures like two-factor authentication such as hardware security keys, you can secure your email account from hacking. Similarly, by dealing with reputable crypto companies that have strong security, regulation, and insurance, and practicing good security hygiene for your account password and by using two-factor authentication, you can very much protect yourself from hacking in the crypto as well.
Question: Keeping in mind that the whole purpose of crypto is to remove cross-border barriers, including costs, that fiat suffers from, is the regulatory framework in development being coordinated in some way across regulators to consider these challenges and enable their removal?
Response: MAS - The G20 has made enhancing cross-border payments a priority during the 2020 Saudi Arabian Presidency. The Financial Stability Board (FSB) is supporting the G20 to coordinate a three-stage process to develop a roadmap to enhance cross-border payments by October 2020.
In July 2020, a report on stage 2 work was published that identified a set of building blocks that could enhance cross-border payments. A few of these building blocks seek to harmonise regulatory, supervisory and oversight frameworks, as well as to foster the soundness of global stablecoin arrangements for cross-border payments.
Question: Will MAS regulate on security requirements on DPT providers, such as custody (cold/hot), insurance, somewhat similar to requirements imposed on banks?
Response: MAS - MAS published a consultation paper on 23 Dec 2019 to propose a new power to enable MAS to impose user protection measures on certain digital payment token (“DPT”) service providers that are suitable to ensure the safekeeping of customer assets held by the DPT service provider. This may include maintaining a prescribed percentage of customer assets in a cold wallet, and maintaining a prescribed percentage of the licensee’s own assets in a cold wallet. The objective is to allow MAS to adapt to the evolving nature of DPT activities and enable MAS to impose appropriate measures in a timely manner. The response to the feedback received from this consultation will be published in due course.
Let us get through this together and be stronger, when the green shoots start to appear.