The Global Narrative Changes as Crypto Revolution is in Full Swing
In the last two years, we have seen a rapid acceleration of both the FinTech and crypto spaces, merging into unified platforms to bring automation and efficiency to the forefront of finance. In the second half of 2021, the interaction between these two spaces with the banking sector is clarifying the trajectory further.
Bitcoin maximalists and holders of digital assets alike should pay attention to what this shift in global narrative means and why it is happening.
Bitcoin is Becoming Institutionalized
In last week’s Bitcoin on-chain analysis, The Tokenist noted multiple indications as to why Bitcoin has so swiftly recovered, even breaching $40k. Just as regulations across the crypto sector are ramping up, so are institutional investors buying the dip from the weak hands. In fact, crypto exchanges have never seen such an outflow of assets within such a short time span.
Outside of supply shock that such balance portends, poised to nudge BTC’s price up, why would this be happening now? All signs are pointing towards the upcoming regulatory crackdown serving as FUD to temporarily bring digital asset prices down, but other benefits in the long run.
After all, Bitcoin accumulated its market cap gains by attracting institutional investors. This momentum eventually rolled up at the doorstep of the largest US banks and asset managers. Now, the final step is for the government itself to set the rules of the game that will affect miners, crypto exchanges, stablecoins, and FinTech platforms that integrate such digital assets.
How the financial establishment views this ongoing integration and regulation is best exemplified with Paxos.
Paxos – The Next Gen Crypto PayPal & DTCC?
While Binance and BlockFi are struggling to redouble their efforts to keep up with government regulation, Paxos is way ahead of the game. As a permissioned rail between crypto and traditional finance, Paxos has become one of the most regulated FinTech platforms out there, with growth to match, at a $2.4 billion valuation.
In April, Paxos announced it would file an application to the SEC to become a formal clearing agency. This was after Instinet and Credit Suisse successfully completed stock trades within the same settlement cycle (T+0). Anyone who had paid attention to GME/AMC stock trading hearings, knows how important settlement cycles are.
In one of the Senate hearings, Sen. Toomey noted that reducing the trading settlement cycle from multiple days (T+1 and T+2) to T+0 would significantly reduce the risk of trades to fail-to-deliver (FTD). Therefore, platforms like Paxos could become a boon to brokerages like Robinhood, which had to raise emergency funding at the height of WallStreetBets-fueled trading.
More tellingly, the second largest US bank, Bank of America (BoA), joined Paxos Settlement Service in May, taking advantage of its existing blockchain infrastructure. In the latest news as of July 29, Paxos announced BoA, Coinbase Ventures, Founders Fund, and FTX to join its Series D funding round. Altogether, Paxos has procured over $540 million in funding so far.
In a nutshell, Paxos has been picked as the go-to provider of blockchain-powered enterprise solutions – wallets, stablecoins, crypto trading, and securities clearing for institutions. This clearly points to a future financial landscape that embraces blockchain efficiency. In turn, crypto holders would be invited to position themselves as participants rather than an antagonistic force.
Cryptos as a Form of Inflation Management
Out of many incongruences in 2020, one in particular stood out. Amid news headlines of mile-long foodbank lines, record-high unemployment claims, and the shuttering of hundreds of thousands of small businesses, the stock market had gone through the roof like never before. There are many reasons for this phenomenon.
One of them is that tech stocks make much of the S&P 500 index. In turn, Big Tech companies were the greatest beneficiaries of lockdowns as a new wave of investments came in to facilitate remote work, communication, content delivery and management. The world is still reeling from this exceedingly high demand in the form of global computer chip shortage, which skyrocketed semiconductor stocks.
However, all other factors pale in comparison to the impact of the Federal Reserve. After the stock market crashed in March, wiping up to 30% of its value, the Fed stepped in and printed more money in a period of one year than it over the previous two centuries combined. This prompted concerns across the board, exemplified by long-time Fed critics.
Moreover, take note that the Fed has to keep printing money to keep the stock market stable. While it turned out to be the case that Fed Chair Powell underestimated the ‘transitory’ nature of inflation, a case could be made that the regulation of the crypto space is one of the tools needed to funnel the excess money supply. The stock market is one container to receive that outflow, and cryptos now join in as another container to prevent the flood from the leaky Fed roof.
Established financiers and managers could already be seeing this trend unfold. Mohamed El-Erian, president of Queens’ College, Cambridge and an adviser to Allianz and Gramercy, recently urged in the Financial Times that both the establishment and self-styled dissenters need to come together:
“At the same time, crypto supporters need to recognise the growing systemic consequences of the continuing and future disruptions, deepening their engagement on regulatory and energy issues. They need to shift away from a “zero-sum” mindset where their gains can only come from the losses of the established financial system.”
This could be why we are seeing such a sudden shift in institutional adoption of digital assets corresponding with increased regulation. Both private and institutional players can kill two birds with one stone – bolster the legitimacy of central banking and help prevent inflation from spiraling out of control.
Have you already diversified your portfolio with Bitcoin, or are you waiting for regulations to become cemented? Let us know in the comments below.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an M(BA) from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.