Cast your mind back a few years and imagine someone had mentioned the word “cryptocurrency” to you. Chances are you would have pictured some strange (and possibly illegal) currency existing in a secret banking system, manned by faceless and shadowy operatives answerable to no one. To this day, the identity of the man claiming to have started the whole thing back in 2008, Satoshi Nakamoto, remains unknown. What is clear is when he devised the very first cryptocurrency (Bitcoin), and along with it, the first ‘blockchain’ ledger system using a decentralized network of computers to record transactions, he (or she or they!) created a revolution in global finances. Bitcoin has not only spawned well over 1,000 other virtual currencies (Ethereum, Ripple and Litecoin are some other well-known ones) but the value of a single bitcoin has skyrocketed since it launched – by mid-November 2020 it had reached $18,500. A 2019 survey by Cryptoradar found that around 20 million Americans were Bitcoin users, and with some experts predicting triple-digit percentage growth over the next few years, cryptocurrency is clearly here to stay.
As such, it is vital that the legal industry needs to keep abreast of developments in this sector. While it still is a relatively new phenomenon, it is now drawing the attention of governments around the world, with major concerns about cryptocurrency online trading operating in unregulated and uncharted legal territory. In the United States, much of the monitoring up to now has come via the Securities and Exchange Commission (SEC) which regulates most cryptocurrencies as securities. It is clear that legislation is lagging far behind the developments, but there is now a paradigm shift in progress as US authorities move to introduce stronger regulation and legislation. Attorneys are going to find themselves dealing with more and more cases – with increasing rules, businesses that want to use cryptocurrency, blockchain technology or to simply invest in it are going to have plenty of legal hurdles to cross. Estate and Family Law attorneys will be ever more engaged on the disposition of crypto assets in cases of divorce or death. Meanwhile, a stronger compliance structure is likely to give cryptocurrency investors more grounds to pursue legal recourse in the event of a loss. Here are some of the latest crypto trends you need to know about.
Digital Currencies Continuing Their Rise
As mentioned above, crypto is here to stay. More and more people are investing in virtual currencies and this will have a direct effect on how businesses view the sector. Certainly, the COVID-19 pandemic will serve to hasten this trend. The recession caused by the pandemic has seen investments in virtual currencies increase heavily while faith in traditional currency has seen a downturn. More generally, the need to follow social distancing guidelines and other regulations has forced a huge shift from physical interactions to digital transactions – online shopping has surged since the pandemic began. As people spend less hard cash physically and become used to spending digitally, it is likely that they will become more willing to look at using cryptocurrencies. As more consumers start using crypto, they will naturally expect the businesses and services they use to accept them. Already it can be seen that an ever-increasing number of retailers and internet sellers are accepting Bitcoin and other currencies as a method of payment. The gambling industry have been early adopters; it is now possible to play many online casinos using cryptocurrency. We are likely to see countries begin to introduce digital currencies backed by the central banks in the near future – China is currently rolling out pilot tests in selected cities and could launch nationally soon. Last year Facebook announced they were going to launch a digital currency of their own called Libra, before rowing back on the concept due to rapid and heavy international governmental pressure. Perhaps the idea was a little ahead of its time, but you can imagine them trying again at some point – that would certainly introduce digital money as a mass concept. There may be a time when crypto replaces fiat currencies – it may be many years before this happens, but more and more businesses will surely move to allow crypto transactions in the very near future.
Decentralized Finance, also known as DeFi, is a small but incredibly fast-growing part of the crypto world. It has the potential to completely revolutionize financial services; you might not have heard of it yet, but you certainly will in the coming months and years. While a central point of cryptocurrency is to make money and payments universally acceptable to anyone, no matter where they are, DeFi creates decentralized financial instruments entirely separate from the traditional centralized institutions. In basic terms, this could make every financial service as decentralized as Bitcoin and other virtual currencies are doing for money. Using blockchain technology, new types of applications known as DApps (Decentralized Applications) are able to execute contracts automatically when certain conditions are met. They are not owned or controlled by a single company, can’t be shut down and run 24/7. Rules are written in code and the DApps run themselves with virtually no human intervention. Many DApps are already live and it could mean that in future, anyone with access to the internet could organise a loan, invest, buy services or insurance and make savings with a stranger anywhere in the world with complete transparency without any involvement from a bank or other middleman. While it is still a relatively small part of the world economy it is growing with exponential speed; in early 2019 there was only $275 million in the DeFi sector. By July this year, it had grown to $4 billion.
Growth of Blockchain Technology
Not only will individuals have access to far freer financial services due to crypto-related tech, but blockchain is starting to have a huge impact across almost all industries such as finance, banking, manufacturing and processing. This will only widen as more and more companies across all sectors adopt the technology. Despite the uncertainty over regulations and governance of blockchain, the advantages for companies are huge and wide-ranging – improving transparency, ease and accuracy of auditing (every change is tracked and recorded), speed, accessibility, and security. Perhaps most critically of all, blockchain tech offers large savings in running costs. The automation of the system helps businesses eliminate the need for third party suppliers and associated transaction fees while generally keeping IT infrastructure and data storage costs down. Banking is adopting the technology at speed to handle cross border payments, verify transactions and general management of financial data. They may not like the concept of cryptocurrency, but they certainly see the advantage of using the associated tech, with major organizations like JP Morgan Chase, Goldman Sachs and Bank of America all being well underway with adopting blockchain. As businesses encounter and become increasingly familiar with the concept they will start using it – especially if they can use it with their bank initially. As such, expect to see the use of blockchain boom over the coming years.
Increased Governmental Regulation
No doubt this will be a major trend in the crypto world over the coming years. As the sector has grown and come onto the radar of governments across the world, ways to regulate and tax crypto are being investigated and progressed. In the US a plethora of various regulatory bodies and agencies have already attempted to assert authority to regulate the sector, with the likes of the Securities and Exchange Commission, Financial Stability Oversight Council and different elements of the US Treasury all pressing for control. As mentioned, these agencies were in existence long before the advent of crypto and were not designed to work in a blockchain world, and given the varying takes individual US states currently have on allowing and regulating it, it seems certain that new Federal legislation (and perhaps new Federal agencies) will be created to give more certainty, clarity and of course, governmental control over these digital assets. This is certainly something the incoming Biden administration will have to deal with soon. Although it could be argued that excessive legislation (especially if punitive taxes are introduced) might prevent some businesses from using or investing in crypto and its associated technologies, it is surely reasonable to believe that stronger governmental regulation would make businesses more confident in adopting them.