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Industry Developments
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Industry Developments
Cryptocurrency
While Bitcoin still has the largest market capitalization of all cryptocurrencies, Ether has been rapidly gaining momentum. Ether posted nearly a 235 percent return in the last year compared to 31 percent for Bitcoin. Ether’s gaining prominence can also be seen in mining revenues, as Ether miners have brought in more revenue than their Bitcoin counterparts in the last three months, according to The Block Crypto. During the cryptocurrency market peak this year, Ether mining revenue topped Bitcoin mining revenue by almost $1 billion. This momentum comes from the Ethereum blockchain’s smart contract capabilities and its heavy involvement in Decentralized Finance(DeFi) projects, two things Bitcoin lacks.
As a Goldman Sachs report from May notes, Bitcoin is primarily a store of value and probably won’t be the most functional payment rail; the value of Bitcoin mostly comes from its widespread adoption rather than its core use cases. However, Ethereum is gradually becoming the preferred host for stablecoin payments in cross-border transactions, as well as in DeFi lending and staking protocols aimed at enhancing financial inclusion. The Ethereum blockchain provides the foundation for a wider digital assets ecosystem beyond retail investing with apps like the lending tool Maker Protocol and the derivative token platform Synthetix. DeFi on Ethereum will probably continue to pick up steam as Ethereum 2.0 is introduced; this next iteration will include a Proof of Stake mechanism that can handle up to 3,000 transactions per second, which is about 3x Bitcoin’s capacity while still being more energy-efficient. As a result, the momentum for Ether could continue to accelerate as its native blockchain Ethereum becomes the face of the next wave of crypto innovation and introduces scalability and practicality to the ecosystem.
According to Vox, the US Marshals have enlisted the help of cryptocurrency custody firm Anchorage Digital to manage seized digital assets from criminal investigations. Given the volatility and technical complexities of the crypto market, it is difficult to store, liquidate, and/or sell seized cryptocurrencies, especially considering that federal government agencies like the Drug Enforcement Agency (DEA) have been involved in large drug busts with significant cryptocurrency seizures. In November 2020, The Wall Street Journal reported that the Justice Department had seized 69,000 Bitcoins tied to the renowned illegal drug marketplace Silk Road, placing the total value at a little over $1 billion at the time of the operation. Now, the same 69,000 Bitcoins are worth over $2.5 billion, demonstrating the attention that must be paid to properly managing these Bitcoins at the federal level. As law enforcement agencies continue to seize cryptocurrencies, federal and state governments could become increasingly significant players in markets. While cryptocurrencies like Bitcoin were originally designed as decentralized representations of value outside of the government’s purview, governments across the world now have the power to inject or withhold liquidity in crypto markets. As Cointelegraph notes, the US Marshals assured the Treasury Executive Office for Asset Forfeiture that it would sell seized digital assets in intervals to avoid distorting the market.
The University of Pennsylvania recently received an anonymous $5 million donation in Bitcoin, according to The New York Times. The gift is significant because of a policy change: For this donation, the university will not immediately liquidate all of the provided Bitcoins, a change from its past history of immediately selling off stocks and bonds provided as donations. It’s an interesting development in philanthropy, especially considering that cryptocurrencies are exempt from capital gains taxes when donated to nonprofit organizations. The tax savings, accountability, and transparency that come with donations listed on a public ledger benefit this new phenomenon, but the university is still taking a risk by holding off on complete liquidation. In just a few weeks, Bitcoin could lose a significant portion of its value, costing the university valuable funds that could go toward scholarship funds, building renovations, student life enhancements, or other critical investments. Bitcoin holders like the University of Pennsylvania could experience losses if an internal technical failure within the blockchain or if external regulation efforts shocked the crypto market. As The Economist notes, nonprofits could be caught in a negative feedback loop during a massive sell-off, as forced liquidation from margin calls for investors that have borrowed money will further accelerate a downward spiral in the price of Bitcoin.
Capital Raising
Spend management startup Spendesk raised $118 million in its most recent funding round, according to Techcrunch. Spendesk’s unique value as a software-as-a-service (SaaS) company is its ability to reduce the friction between employees and owners in managing company money, streamlining expense management, and creating a more efficient way for employees to budget for important resources. With Spendesk’s platform, each employee can access a company card that allows them to circumvent the slower process of filing for reimbursement after making a purchase. Spendesk customers like Moneybox and Birchbox have said the platform has made life easier for their finance and accounting teams, as they no longer have to aggregate receipts for all purchases made on a select few company credit cards. Employees have the autonomy to make their own purchases for the business within predefined guidelines, and their spending activities are automatically recorded for accounting convenience.
Global Developments
Digital Lending in South Korea
Debt in South Korea has reached historic levels, as the household debt to GDP ratio in the country last year was a whopping 103.8 percent, as reported by the Financial Times. South Korea’s self-employed adults, who represent close to 25 percent of the workforce, have struggled to pay their bills, leaving them desperate and willing to take out high-interest loans from traditional financial institutions. Interest rates can be as high as 20 percent for high-risk borrowers, creating a potentially massive debt burden on self-employed individuals that have been negatively impacted by the coronavirus. High-interest rates could potentially lead to South Korean families taking out loans to cover interest payments, meaning they would essentially be paying off old debt with new debt. Rolling over debt could lead to a debt spiral, and interest rates sharply increase for individuals as they add more risk. In response, the South Korean government has called upon FinTech firms like PeopleFund to refinance loans and offer lower interest rates to reduce the number of defaults. According to an interview with PeopleFund CEO Joey Kim in The Asian Banker, the peer-to-peer lending platform operates by reviewing and raising funds for loan applications that are eventually sent to a partner commercial bank to directly issue the loan to the applicant. Moving forward, FinTechs like PeopleFund will be critical to the foundation of the South Korean credit market; as larger savings banks continue lending money at higher interest rates, PeopleFund will need to step in to maintain debt affordability. Debt affordability, which here refers to the ratio of household interest payments to household income, needs to be stable to preserve the health of the South Korean economy. If high-interest loans cripple small enterprises and individuals, the central government will lose valuable sources of tax revenue needed to implement fiscal policy, business investment will fall, and the booming domestic stock market could suffer liquidity shortages.
A recent blog post by the International Monetary Fund (IMF) has cast doubt on the adoption of cryptocurrencies as legal tender in national economies. The article notes that even residents in countries with weak currencies and high inflation would probably prefer holding more stable assets like the US dollar or the euro, as opposed to volatile cryptocurrencies. Moreover, setting monetary policy could become cumbersome and complex if Bitcoin were a country’s primary currency. For example, El Salvador wants to decouple itself from the vagaries of US monetary policy, but it does not have the authority to control the Bitcoin supply and set interest rates on the cryptocurrency. Interest rates are an important monetary policy tool and can help manage inflation, which is why El Salvador wants autonomy from the US Fed’s decisions; however, Bitcoin adoption still may not give the country the flexibility it needs to maintain a healthy economy with price stability. IMF concerns are backed by recent analyst commentary in a Bank of America report that details how fiscal policy could also suffer from Bitcoin adoption, according to Bitcoin.com. Allowing citizens to pay taxes in cryptocurrency is an unstable mechanism for raising critical revenue; daily swings of 10 percent in Bitcoin’s value would handicap government spending and limit its ability to counter economic downturns.