Cryptocurrency 4.0 — Adopting a FOMO State of Mind
As the Cryptocurrency industry continues to mature and revolutionize the larger FinTech world, its growth within Israel has followed suit. According to research done by ReportLinker, the global Cryptocurrency market size is expected to grow from $1.6 billion USD in 2021 to $2.2 billion USD by 2026 at a compounded annual growth rate (CAGR) of 7.1%.
The well-developed hi-tech ecosystem of Israel constitutes a favorable environment for Cryptocurrency to thrive, driven by the early adoption of a massive stake of its population, Israel’s involvement in this industry is developing rapidly.
There are over 10,000 existing Cryptocurrencies with a combined global market cap of about $1.38 trillion USD as of July 2021, and while most have little to no following, there are several coins that have acquired a substantial community of investors. At a value per-token 15.25x higher than its next closest competitor and a market cap of almost $600 billion USD, Bitcoin is the world’s first decentralized and most dominant Cryptocurrency. While Bitcoin was initially designed as a medium for daily transactions, it serves today more as a store of value.
The extreme volatility of Bitcoin was on full display on April 14th, 2021, when it hit an all-time high at just below $65,000. These record-breaking gains led to a fear-of-missing-out, or FOMO, among day-traders and hedge-fund managers alike, causing a surge in retail investment interest in the Crypto market. This de facto gold rush was also marked by institutional investors like Tesla, who’s CEO Elon Musk announced in February that Tesla had invested $1.5 billion into Bitcoin. Tesla has since halted Bitcoin transactions due to climate concerns and will start up again when miners’ energy usage is cleaner. While today Bitcoin hovers around $33,000, this is just a 50% plunge after an almost 500% increase since last summer.
At a market cap of about $250 billion and a per-token value of over $2000, Cryptocurrency Ether (commonly referred to as Ethereum) are the next most significant players on the scene after Bitcoin. While the Ethereum network’s primary focus is the facilitation of smart contracts and decentralized applications rather than an alternative monetary system, Ether has been pushed into competition with other Cryptocurrencies by its own popularity. Additional popular coins include XRP, Litecoin, Binance Coin and Cardano.
The institutionalizing phase
More than 60 central banks have explored CBDCs since 2014, where the payment infrastructure would function similarly to existing digital wallets and mirror the convenience and efficiency of completing a transaction with the wave of a phone at a payment terminal. In May of 2021, the Bank of Israel announced that they are researching the feasibility and benefits of developing their own central bank digital currency (CBDC) as well as an action plan for the potential issuance of a digital Shekel.
In a global economy where Cryptocurrencies are on the rise and notes and coins are quickly falling out of use, central banks like Israel’s are feeling the pressure to develop a viable alternative before unregulated payment forms become the norm. Issuing this digital form of fiat currency comes with an expectation for many benefits, such as providing security to all transaction participants, creating an efficient and cheaper cross-border payment infrastructure, and ensuring a backup for the payment system in case of an emergency breakdown. This also means increased inclusion of unbanked individuals, resulting in accelerated competition for private companies as they feel the pressure to answer calls for greater transparency standards.
The money trail — Israel as a crypto nation
According to Startup Nation Central, $101million has been invested into mobile wallet startups so far in 2021 in Israel, as compared to only $50.1M in all of 2020, demonstrating the spectacular growth of this particular vertical. Additionally, $290.4M has been invested into Israeli digital payments startups so far in 2021, as compared to only $189.4M in all of 2020. While the Israeli digital wallet market is still in its early stages, 2021 is set to end with various solutions; the bulk of these market participants are credit card companies and banks that have issued digital wallets for their existing customers, as well as Apple and Google who are expected to enter the Israeli market by the end of the year. As of March 2021, 60% of payment terminals in Israeli businesses were smart terminals, which are payment terminals with digital wallet functionality. With the increasing regularity of operations comes the universality of digital wallets, so expansion of this technology should be expected in Israel and beyond.
Like any emerging industry in its infancy, global and local regulations issued by the Central Banks and Securities Authorities around the world are going to be a primary concern in the coming years when it comes to potential market entry for digital wallets and Cryptocurrencies.
For digital wallets, the current challenge regulators face is balancing customer privacy while not obstructing the value that digital wallets are providing the global economy. Making this balancing act particularly tricky is that the average customer is not fully aware of how their data is used when they enable different functions and data aggregation abilities, leaving regulators with the responsibility of potentially restricting access to customer information.
Many authorities dealing with Crypto regulations are facing similar problems mirrored around the world, one of which being the classification of tokens. Determining whether utility tokens issued by companies should be classified by tax authorities as a security or an asset, and then taxed and regulated as such, is an example of one such problem.
In Israel, the ISA’s March 2021 position paper ruled that Cryptocurrency tokens issued by companies are securities, not assets, and are therefore subject to Israeli securities regulations. This position paper comes just two weeks after the U.S. Securities and Exchange Commission (SEC) accused Blockchain payments startup Ripple Labs of distributing their aforementioned Cryptocurrency XRP as “illegal unregistered securities”. Ripple claimed XRP has served as a currency and thus did not have to be registered as an investment contract. The fact that Cryptocurrency is subject to redefinition by regulators across the world is a legitimate deterrent for those looking to enter this market.
So, what’s next?
It seems that to fully harness the power of the Blockchain and the digital currencies industry, interested potential market participants must be able to anticipate and adapt swiftly to the rapid regulatory developments that so often accompany exciting opportunities. As Cryptocurrencies and their related technologies are quickly acquiring legitimacy and universality, and as we see more cutting-edge technologies and Cryptocurrency payment gateways taking over different global markets, the future of crypto innovations is becoming increasingly difficult to ignore.
*The article was published by The FinTech Times
