2020 has provided the incentive to rethink our approach to money

Published at: Dec. 30, 2020

2020 has been a year of upheaval throughout the world. Overshadowed by the COVID-19 pandemic, the events of this year brought forth new challenges no one was prepared for, upending the way we live, work, and transact. Early this year, global financial markets took a severe hit as stocks, commodities and even cryptocurrency prices fell.

Against the backdrop of economic uncertainty and the declining value of the U.S. dollar, crypto assets are moving higher up the radar screens of commercial banks, hedge funds and other institutional investors. As we approach the end of a tumultuous year, it would be timely to recap the events that have been significant for the crypto industry this year, while looking ahead to new developments in 2021.

The DeFi boom

Unless you’ve had your head in the sand for most of 2020, you probably witnessed the explosive growth of the DeFi sector this year. Particularly with crypto lending and decentralized exchanges, which attracted an enormous amount of capital inflow in a very short period of time. DeFi applications have been running in parallel with legacy financial systems in the last few years, but the void left by traditional financial services during this crisis demonstrates the pressing need to move to a much wider adoption of DeFi services. In a world where cash payments are no longer welcome and people predominantly work from home and transact over the internet, the move to DeFi seems a natural one.

While there’s no denying the real potential of DeFi, one question we should be asking is: Will this growth be sustainable? As we’ve seen in the past with other subsectors of crypto, they tend to follow a cycle where, following exponential price increases of new tech platforms and protocol tokens, the market goes into profit-taking mode. This results in fast declining prices, which precedes a slow recovery phase. The platforms that have survived those volatile early stages are now slowly consolidating their positions as adoption increases, and token prices are starting to be driven by more fundamental criteria such as number of users and platform volumes.

As DeFi is still currently only experimented with by yield-seeking traders, it remains to be seen whether DeFi will chart the same path in 2021 and beyond; however, its transparent, highly liquid and flexible financial models certainly hold great potential to benefit the real economy at large.

Seeing with fresh eyes

The economic rollercoaster of 2020 and high volatility of the financial markets have yet again cast a spotlight on Bitcoin (BTC) and its function as a store of value. This has attracted an increasingly large number of prominent financial players. While Bitcoin may not be used as a transactional currency anytime soon, it’s clear that Bitcoin still maintains its digital gold status and is now increasingly perceived as a credible store of value by mainstream market participants.

Large private and publicly-listed corporations are seen diversifying their treasury positions into Bitcoin as a way to hedge against the impending inflation and benefit from potential gains in Bitcoin’s price appreciation — most notably, Michael Saylors’s MicroStrategy, divesting $425 million into Bitcoin this September.

What’s perhaps even more interesting is that we’re seeing the world's central banks begin to warm to the world of crypto. While they have certainly watched the space from the sidelines with great interest, the COVID-19 crisis became a catalyst for them to act. In tandem with the Bank for International Settlements, several major central banks around the world took early steps in the right direction by publishing a report outlining a potential framework for introducing CBDCs as an alternative to cash.

That said, significant technical and structural barriers must be overcome before any CBDCs become reality. To support these efforts, Mastercard created a virtual testing platform to allow central banks to assess and explore the implementation of national digital currencies, and is already beginning to test how it could incorporate CBDCs into its operations. PayPal has also marked its entry into the cryptocurrency market, enabling U.S.-based PayPal users to buy and sell digital currencies directly from their PayPal accounts.

Overall, it seems as though the blockchain and crypto industry is now being taken into consideration more seriously as a technology and an asset class by both private and public institutions, who are finally starting to realise that this industry will be here to stay for the long run.

Crypto in a post-COVID-19 world

Even before the global pandemic, there had been growing interest in the use of non-physical forms for cash; but when COVID-19 struck, it accelerated the shift towards remote, contactless payments, and the use of cash has fallen — this has all but strengthened the case for a digital payment system which, once merely thought of as just a convenience, is now more important than ever.

Moreover, in places where people cannot access closed banks but are connected to the internet, donations made in cryptocurrencies could serve as a practical alternative to enabling more individuals to receive financial help, including some of the most disadvantaged. In addition, donating in crypto can make moving money across borders much easier and much faster, with much lower processing fees.

As a distributed ledger technology, blockchain also has a key role to play in the post-COVID-19 world. Trust-minimising blockchain solutions can be helpful when dealing with remote parties, as is the case during times when travel has become nearly nonexistent. To foster innovation and creativity within the tech community, blockchain hackathons could promote the development of blockchain-powered solutions with the potential to enable financial inclusion, reduce the digital divide and tackle the challenges posed by the pandemic.

Looking ahead to 2021

As we begin our recovery from perhaps the most dangerous health crisis that humanity has faced in a very long time, financial topics such as increasing global stimulus measures, ongoing market volatility and the looming spectre of a global currency reset are set to dominate the headlines in 2021. The current and upcoming financial crises triggered by the world’s governments reactions to stop the spread of COVID-19 have the potential to fast-forward the adoption of digital currencies.

We see these macro events as the prime drivers for central banks as they work to develop their digital currency models. Looking ahead, the advent of CBDCs will represent a seminal point in terms of the maturation of the technology, providing the crypto industry with a plethora of new opportunities — and challenges — for the creation of next-generation smart open finance products and solutions that will cater to the yet untapped global mainstream audience.

In addition, with signs of strong growth in the nonfungible token space, we can also expect to see a growing number of artists, NFT creators, games and marketplaces joining the space. As the world becomes more and more digitalised, NFTs are primed to be the solution to the question of ownership in the virtual marketplace as well as a new source of revenue — particularly when on-site events and sales are unavailable or out of reach.

In such turbulent times, what is clear is that while the coronavirus pandemic presents many challenges, it is also a unique opportunity to rethink how trust-minimising solutions like blockchain can help us discern legitimate data from social media noise.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Eddy Travia is the CEO of Coinsilium, a focused blockchain, DeFi and crypto finance venture operator. Eddy has extensive experience in private equity, deal structuring, due diligence supervision and advising foreign funds and angel investors investing in emerging markets. Eddy has been living in Asia for 15 years and has recently been appointed the Director of IOV Labs Asia, a Singapore-based joint venture between Coinsilium and IOV Labs. Eddy completed the Stanford Financial Engineering program for finance executives in Hong Kong and Oxford’s Algorithmic Trading program.