With the COVID-19 pandemic, 2020 proved to be a tumultuous year for many of us. With the lockdown of countries and sudden closure of international borders, countries around the world witnessed economic slowdown. Unlike the cryptocurrency bull run in 2017, the cryptocurrency rally in 2020 was driven by rising institutional interest in digital currencies. Obtaining a cryptocurrency license serves as an official permission to conduct a regulated cryptocurrency business in a country. As the COVID-19 pandemic has accelerated digital transformation, it will be interesting to find out the trajectory of the cryptocurrency market in the near future. We will explore what are the 4 upcoming trends that will change the crypto world in 2021.
1. Stricter cryptocurrency regulations
Numerous countries have increasingly clamped down on the institutional use of cryptocurrencies. In the past year, cryptocurrencies have witnessed a significant increase in popularity, with cryptocurrency market capitalization exceeding way past $2.3 million and having over 200 million users worldwide. However, due to the highly volatile and speculative nature of cryptocurrency, this has resulted in numerous countries clamping down on the institutional use of cryptocurrencies. This can be attributed to central banks perceiving the volatile decentralized currency as a threat to the country’s financial stability.
In May 2021, we witnessed China banning financial institutions, such as banks, and payment companies from providing services related to cryptocurrency transactions. It is said that China will crack down on bitcoin mining and trading behaviour. China’s actions are supported by the Chinese government’s belief that virtual currencies “are not supported by real value” and the easy manipulation of crypto prices.
Moreover, Ripple has been facing a lawsuit with U.S Securities and Exchange Commission (SEC) for conducting $1.3 billion unregistered Securities Offering. They have been charged for conducting investments without proper license by the SEC, asserting that Ripple’s XRP token is a tradable asset. This raises the question of the nature of cryptocurrencies as it is claimed that XRP is a security, and not a commodity or other type of asset.
Coupled with concerns of an increased risk of illegal activities such as money laundering and cybercrimes, it is likely that more countries will ramp up their calls for increased regulations on cryptocurrencies in 2021.
2. Continued growth in the DeFi Sector
Decentralized Finance, or commonly referred to as DeFi, aims to use technology, such as smart contracts to remove intermediaries between parties in a financial transaction. One significant advantage DeFi has over traditional finance is that the transfers of funds happen in minutes. There are numerous things you can do with DeFi, which includes access to stable currencies, trade tokens and borrow funds with and without collateral.
The Total Value Locked (TVL) in DeFi, which measures the value of assets committed to the DeFi ecosystem, crossed its all time high of more than $35 billion in February 2021. This can be attributed to the meteoric rise in the demand for DeFi tokens and more investors engaging in yield farming. In yield farming, users deposit their cryptocurrencies in a pool of funds and receive interest. Compound is the largest yield farming DeFi platform, which offers an annualised interest rate of 6.75% to people who save with stablecoin Tether. Moreover, DeFi helps to bridge the gap between the blockchain and traditional finance worlds. One example is TrustToken, which allows individuals to borrow money without locking their cryptocurrency as collateral.
With DeFi developers constantly looking for ways to attract more users by building new innovative projects, it is expected that the DeFi sector will continue to evolve and grow in 2021.
3. Greater demand for Blockchain Solutions
The COVID-19 pandemic has inevitably forced numerous businesses to accelerate their digital transformation process so as to keep with new challenges. Due to increased demand for contactless transactions, there is a greater demand for tech solutions such as blockchain technology from businesses to facilitate their business processes. Blockchain technology is likely to transform how businesses function and help build more efficient processes. Beyond financial services, the adoption of blockchain technology is revolutionising food distribution, supply chain and agriculture. Previously, businesses had to incur costs when paying wages to employees who reside internationally. However, the world’s first Bitcoin-based payroll service, Bitwage, enables businesses to save both money and time when transferring money to employees.
4. The risk assessment model will improve
With the rapid increase in value of Bitcoin, this brings about fears of increased risk in the industry, therefore necessitating the use of risk management tools. According to a study by CoinMarketCap, there are more than 8000 cryptocurrencies in the world. While the majority of these cryptocurrencies are deemed as fraudulent, the growth rates of a minority of these coins even outperform that of Bitcoin. The development of analytical tools for cryptocurrencies may be beneficial for novice investors. As cryptocurrencies are deemed as speculative assets and inherently risky, it is necessary for investors who wish to invest in cryptocurrencies to analyse a variety of risks that can raise or collapse the value of a particular coin.
- Organisational Risk: The country where the currency is operating and the legislative changes taking place in the digital assets market should be considered.
- Technical Risk: Errors in codes, weak information security and weak data protection are some of the features criminal syndicates exploit to commit cybercrimes.
- Price Risk: While it is the most challenging risk to assess, the introduction of KYC (user identification) and KYT (transaction identification) will enable analysts to track movement of substantial volumes of cryptocurrencies. They can obtain information on the owners and track their actions. With this data, it is possible to predict the changes in value of cryptocurrency which is dependent on the goals, time and market size increase.
With the wider adoption and increased institutional interest in cryptocurrencies, the blockchain industry is expected to accelerate in 2021. Tetra Consultants provides our clients with an easy, hassle-free way to obtain a cryptocurrency license. Our team of experts will explain and guide you through the full application process so that your company can begin your cryptocurrency business activities in your preferred jurisdiction as soon as possible.
