Digital Vision: Digital Banking

Smarter Banking

Moving from the investment to utility phase in the cryptoeconomy

Marcus Hughes, Coinbase’s Managing Director for Europe

The cryptoeconomy is growing, both in stature and in usage. We’re moving beyond a simple investment and speculation phase to applied usage and global implantation of crypto beyond finance and digital experts. How can this usage be realized, what will its impact be, and how can we predict what is going to happen?

Since their inception, cryptoassets have primarily been seen as an investment opportunity, with their value fluctuating as people speculate on their future role within the financial system. But it is ultimately the utility case for cryptoassets that will determine their long term value. We have always thought about adoption in two phases: the ‘investment phase’ and the ‘utility phase’.

Today, the majority of interactions happening in the cryptoeconomy still largely involve retail and institutional investors speculating on the price of assets. We are, however, seeing increasing signs that the cryptoeconomy is moving past this pure investment phase into the utility phase, as more crypto and blockchain-based projects are maturing and finding product market fit.

But what does the ‘utility phase’ actually mean? Can businesses and individuals unlock the potential of cryptocurrencies, and other cryptoassets including utility tokens, stablecoins and security tokens, and can that adoption improve the financial system and empower economic freedom?

The power of blockchain

These are both big questions and we believe the answer is yes, but to see how we get there it is important to understand the technology underpinning cryptoassets – the blockchain.

Put simply, the blockchain is a system for recording information; essentially a public database that records transactions in a distributed, decentralized way across many computers. This ensures that the record is permanent and cannot be altered in any way. It removes the need for an intermediary (like a bank or land registry) by passing responsibility for maintaining and validating the database to cryptographic algorithms.

While primarily used for digital financial assets, blockchains have a myriad of use cases, from recording property transactions, to selling art, and even the NHS’ Covid-19 vaccination programme. But we believe that it is cryptoassets that will unleash the full potential of blockchain.

Emerging use cases for cryptoassets

Broadly speaking, there are four types of cryptoassets, and they all serve different functions:

Exchange tokens – (or digital / crypto currencies) – these are the most widely known and allow value to be transmitted by users quickly & securely, with minimal friction & cost.

Utility tokens are used to fund the development of a project; holders can use them in exchange for access to a company’s products or services.

Stablecoins, digital tokens replicating the value of a stable underlying asset or basket of assets (e.g. the US dollar), taking advantage of blockchain technology.

Security tokens, a class of assets aiming to be the crypto equivalent of traditional securities like stocks and bonds. These are the least developed today.

The inherent use cases within these assets are starting to be realized. Exchange tokens are making an increasing impact on payments and remittances, removing much of the friction involved with transactions in the traditional banking system, and we have seen this make it far cheaper for people to send money abroad (reducing the costs from 5% or more to under 1%). The wider efficiencies provided for businesses and customers are seeing payments giants such as VISA, Mastercard and Paypal now incorporating crypto more directly into their networks. It is also increasingly possible to earn a passive yield on a number of different assets by simply holding them in your portfolio.

Elsewhere, utility tokens are powering blockchain networks by allowing businesses to fundraise directly from customers rather than banks, one example of ‘decentralized finance’ or ‘DeFi’. And networks such as Ethereum are providing infrastructure that enables developers to build and launch decentralized applications (Dapps) and smart contracts. These can remove middlemen, reduce fees and improve privacy, and their potential has led to the network’s token, Ether, reaching a market value that is second only to Bitcoin.

And as we move further into the utility phase, it’s exciting to see the ongoing shift to ‘proof of stake’ blockchains enabling holders to earn a return on their holdings. The validation networks of these blockchains rely on people ‘staking’ their existing assets to validate transactions, rewarding them for doing so. Companies like Coinbase are able to simplify this very complex process, enabling more people to benefit and facilitating wider adoption into the cryptoeconomy, and we were excited to recently open our waiting list for staking rewards on ETH2.

Moving into ‘Finance 2.0’

We believe that today’s progress in crypto adoption can also power greater change in the future. Instantaneous, low cost, cross border payments, smart contracts and public ledgers can all play a role in improving property rights, providing easier ways to start a business and ensuring freedom from corruption, as well as powering greater financial inclusion for the unbanked.

At Coinbase we fully embrace these developments, as they play firmly into our own mission to increase economic freedom in the world. By offering our customers not only the ability to trade assets, but also the ability to use them for a wide range of applications, our goal is to act as a gateway for 1 billion people to access the benefits of the wider cryptoeconomy.

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Adrian Gregory, Global Head of Financial Services & Insurance and Global Head of Atos|Syntel