2021 should go down in the books as the year when digital currency metamorphosed from the fringes of finance to becoming mainstream. More than 220 million people use cryptocurrencies, according to a July Crypto.com report. While crypto has infiltrated industries ranging from e-commerce to travel to sports betting, it’s flat-out booming in finance: As of the middle of 2021, financial institutions spent an estimated $552 million on blockchain-powered projects, Fortunly estimates.
Here’s a recap of the year’s biggest shifts within the financial crypto landscape, and what to watch for in 2022.
Adoption by the Traditional Financial Sector
Major financial firms began to adopt crypto, driven by the millions of customers demanding it. One by one, the nation’s largest banks announced different ways they would integrate digital currencies into their offerings, in many cases also adopting technologies to provide them the computing power to record and validate huge volumes of transactions on a blockchain. Morgan Stanley now offers wealth management clients bitcoin exposure; Goldman Sachs now posts digital asset prices on its Marquee platform for large clients (and, full disclosure, has made an investment in my own blockchain infrastructure firm). Bank of America offers crypto futures trading after acknowledging the crypto ecosystem, with a $2.15-trillion market capitalization, was “too large to ignore.”
Even though JPMorgan’s chief executive has voiced skepticism, the bank has veered toward crypto at the behest of clients. And it’s not just the megabanks — Pennsylvania-based Customers Bank just started onboarding its first cryptocurrency businesses and its own internal digital fiat token.
The evolution has begun, but the attitude shift is far from complete. Any remaining trepidation is natural given a global financial system that has run on government-issued fiat currency for generations — but we are clearly seeing a sea of change.
Watch for financial industry leaders’ sentiments to evolve from hesitant adoption to activism within regulatory discussions, and perhaps even fully embracing crypto. A couple of factors will play into creating a greater comfort level. First, industry trends will continue to underscore that all assets are moving toward digital, and naturally, banks will want to compete. Greater momentum behind regulations and legislation pertaining to crypto and, by extension, their businesses will also capture their attention; banking leaders’ voices will no doubt be reflected in these nascent rules. And perhaps most importantly, there’s the power of experience. As big banks organize blockchain infrastructures, the security and efficiency benefits will become tangible.
News in Validation and Staking
Cryptocurrency validation and staking is very much in the weeds, but worth spending a minute on. The entire conversation around staking – a way of earning rewards for holding certain cryptocurrencies – has changed.
The practice of staking holds particular value for financial institutions as it makes blockchains more efficient and resistant to attacks and enables networks to remain decentralized, validating which transactions have taken place without needing a central authority.
To date, the prevailing way networks, including Bitcoin and Ethereum, have accomplished this validation is through a consensus mechanism called proof of work (PoW), where miners use a huge amount of computer processing power to validate transactions on the blockchain. However, the new version of Ethereum coming this year, Ethereum 2.0, will instead use a consensus mechanism called proof of stake (PoS) – a system where users validate transactions on the network instead of computers based on how many coins on the network they hold.
Expect the full merge of ETH 2.0 to happen in 2022.
Watch for banks to marshal infrastructure to launch new PoS networks as a means to garner competitive yields and avoid risk within this new model. Outsourcing is a cost-effective option I expect many banks will pursue.
Mainstream Adoption by Retail Investors
To date, the major adoption we’ve seen in DeFi is from veteran crypto users. However, the full merge of Ethereum 2.0 will change that and bring DeFi products to the masses.
Expect the market size of crypto to expand three to four times due to the evolution around liquid staking, lending and DeFi. Mainstream customers don’t want complexities and they don’t want their money held ransom. Liquid staking, for example, enables would-be stakers to participate with a smaller amount of ether, and to avoid having it locked until the merge is complete. And there are now consumer-facing apps like MyEtherWallet (MEW), which should start growing in popularity, that lets users stake crypto tokens from their mobile devices.
It’s been incredibly exciting to have a front seat throughout these past couple of years, especially during 2021. And now, the adventure continues.
