Where Does Crypto Go Next?

Even to the casual observer, it was clear that cryptocurrencies hit the big time in 2021.

Headlines made last year helped cement crypto in the zeitgeist.

Crypto-related news included a massive surge in the price of bitcoin. Before the start of the Covid-19 pandemic, the cost of one bitcoin never exceeded $20,000; mostly, it was far lower than that. Then it surged more than three-fold to an all-time high above $68,000 in November 2021 as institutional investors poured cash into the cryptocurrency. Even Fidelity began to allow bitcoin holdings in 401k portfolios. An abundance of new cryptocurrencies built on alternative blockchains with myriad uses and purposes have emerged to drive the overall crypto market up in value and hype.

While crypto gained traction with many, it never shook all of the skeptics. Warren Buffett in April essentially called cryptocurrencies worthless, and the skeptics seemed vindicated in early May when the TerraUSD cryptocurrency, which is a “stablecoin” intended to always be worth $1 per coin, collapsed under a wave of panic selling, leading investors to lose $40 billion of value in the span of a few days.

The stunning turn rattled the entire crypto universe, with cryptocurrencies trending down in line with higher-risk tech stocks this spring. Bitcoin had settled below $30,000 as of early June. The question now is: What’s next?

Crypto enthusiasts pitch a vision of decentralized finance providing access, opportunity and transparency. Many observers remain unconvinced cryptocurrencies can overcome the hurdles presented by governments and systems to achieve that ideal. Nevertheless, even one-time cryptoskeptics now see the potential for innovations that could change the world over the coming years.

“I was once a crypto naysayer, but now the technology has started to make more sense,” says Professor Dennie Kim, who teaches in the Strategy, Ethics and Entrepreneurship area and has started to develop a research interest in crypto. “We are at just the beginning,” he says.

Collectibles and Art: A New Frontier For Emerging Blockchains and Crypto

An important factor in the crypto boom was a related boom in activity in non-fungible tokens (NFTs), which are digital assets based on blockchain technology. Some of these digital files started selling for millions of dollars in early 2021 and supported the value of alternative blockchains, such as Ethereum and its corresponding cryptocurrency ETH.

“These things are digital cultural artifacts,” Kim says. “So much of our lives are digital, it is almost shocking.” Kim sees the NFT phenomenon as part of the evolution of the art world. Many young artists use computers as their means of creation. That led to the idea of selling a digital file, an NFT. Kim says the phenomenon benefits the artists more than in the past, when art dealers dominated the sales process and many creators had little power. Through the blockchain, art makers can go direct to the customer and earn a residual fee on future sales.

“This is an evolution of how artists and creators can work,” he says. In addition to art, NFTs are used to log unique ownership of everything from digital sports collectibles to memberships at private restaurants to rights to claim future digital or real-world products and experiences.

Crypto and Sovereign Currencies

In mid-2021, El Salvador became the first country to adopt bitcoin as a legal currency, lifting the hearts of cryptocurrency fans. The Central African Republic followed suit in April. There’s long been a view that crypto could replace paper money printed by national governments. Indeed, other countries such as the United Kingdom, China and the U.S. are looking into the practicality of using digital currencies. However, in practice, using cryptocurrency as a nationally mandated legal tender has both pros and cons. In El Salvador’s case, earlier this year the International Monetary Fund requested that the country drop the program. The intergovernmental organization was concerned for the country’s financial stability.

Central banks, such as the Federal Reserve, would also face challenges.

“It’s not clear to me how, under a regime of digital currency, the U.S. Federal Reserve would manage the money supply,” says Professor and Dean Emeritus Robert Bruner.

Unlocking a More Inclusive, Efficient Financial System

On the positive side, the use of crypto has the potential to help develop a more inclusive financial system in the U.S.

“Financial access is crucial to begin to redress the problems of economic inequality,” Bruner says.

That’s a meaningful problem in the U.S. As recently as 2019, more than 5 percent of households didn’t have access to a bank account, according to a survey by the Federal Deposit Insurance Corporation. For all adults, the figure was 10 percent. Theoretically, a blockchain-based digital currency could move those figures closer to zero. “The more that digital currency enlarges the access to financial services, the better,” he says.

Buying and selling digital currency can be more efficient than current financial transactions, according to Professor Yiorgos Allayannis.

“Blockchain tech will make things a lot faster and cheaper and safer,” he says. It would also reduce the risks of checks lost in the mail, or stolen or misplaced by recipients. Indeed, no one would need to waste time depositing physical checks at a bank. “For instance, [COVID-19 pandemic relief] stimulus checks could have been distributed using blockchain technology to people who didn’t have bank accounts,” he says. “If you think about the future and want to send money to certain populations, then you could do that very efficiently and quickly, if they have digital wallets.”

The blockchain technology could also speed up the movement of money from country to country.

Currently, many cross-border transactions take days rather than hours to complete. Part of that tardiness is because money laundering rules imposed by governments slow down the process, Professor Kinda Hachem says.

The good news is blockchain technology can and is helping speed up the stodgy banking system, Hachem says.

“I’m on board with what JP Morgan is doing for its institutional clients to move money across borders,” she says. That bank uses the JPM coin, which is not a cryptocurrency but uses an internal blockchain ledger to record where every dollar has come from or gone to. That makes the process to prevent money laundering more efficient.

However, Hachem sees a potentially huge problem regulators should worry about before the world adopts a decentralized blockchain technology as the wiring for the global financial system.

“There is a bit of operational risk in the way these blockchains are set up to support decentralized payments,” she says. “The vulnerability is that current blockchain payments technology is programmed to accept the longest available blockchain as the correct ledger.”

That creates a potential exploit in which a longer blockchain can be made offline and then introduced into the system for fraudulent purposes, Hachem says. The detail is technical, but the vulnerability is simple: Bad actors could essentially steal bitcoin or other cryptocurrency holdings through remanufacturing a blockchain. That could cause the entire blockchain payments system to break down.

“If that happened then no one would trust the system,” she says.