Thirteen years into the wild ride we know as cryptocurrency, it is safe to say that crypto is not just here but is thriving. Every company should take note. We are entering a new era of human history, where virtualization, tokenization, and disintermediation will win the day, creating new paradigms that existing companies will need to understand, become part of, and innovate in—or be shuffled off into irrelevance.
The Rise and Rise of Cryptocurrency
Bitcoin launched in 2009 with its so-called “genesis block.” Pseudonymous creator Satoshi Nakamoto commemorated that first batch of transactions by quoting a headline from the January 3 edition of The Times of London: “Chancellor on brink of second bailout for banks.” In eight words, he conveyed the crypto movement’s beliefs about the existing financial system: that it is corrupt and unreliable and that banks and middlemen should be cut out, democratizing finance through the marriage of cryptography, game theory, the internet, and distributed computing, all governed by impartial computer code.
Since then, thousands of coins and tokens have been minted—too many of them low-quality projects—and Bitcoin has soared to a market capitalization that exceeds $1 trillion. There are now over 80 million Bitcoin wallets, which store the private cryptographic keys that allow access to the asset, and 43 percent of U.S. males aged 18 to 29 have bought some type of cryptocurrency.1 Global crypto adoption is exploding in many places around the world, including Vietnam, India, Pakistan, Ukraine, and Kenya, mostly to preserve savings as government-issued, fiat currency devaluates.2 According to Crypto.com, global crypto users now exceed 221 million around the world, doubling in just four months in early 2021.3
One last data point: For years, critics have been pointing to various scenarios that signify the “death of crypto.” One by one, those moments have passed and crypto roars on. Most recently, the government of China cracked down on Bitcoin mining in the country—this had long been anticipated as an indicator of the crypto apocalypse, signaling impending doom for Bitcoin. And, indeed, the crypto miners in China packed up their powerful computing operations, and Bitcoin processing power declined, as indicated by its hash rate. But then the algorithm adjusted, the miners set up elsewhere, and the hash rate again increased. Like a honey badger, Bitcoin didn’t care. It kept cranking out blocks, adding to its perpetual and immutable ledger of transactions—the so-called blockchain—demonstrating how decentralization and other design elements have made it extremely resilient.
Other decentralized finance (DeFi) projects continue to innovate as well. Often using the Ethereum ecosystem, initially built for the ether cryptocurrency, companies have developed innovative projects like blockchain-backed online gaming and non-fungible tokens (NFTs) for digital art and other tradable assets. The many other blockchain-backed financial offerings include mortgage services, “staking” services where users help to monitor the blockchain and earn up to a 30 percent return on their tokens, and other increasingly complex financial products. All of this while the “metaverse” is only beginning to enter our collective lives—a virtual reality space where crypto, the native money of the internet, is bound to dominate.
What Does This Mean, Practically?
Companies grow by recognizing transformative technologies, embracing their potential for innovation, and balancing the new risks they pose. When it comes to crypto, practical implications include:
Emerging technologies working groups. Every company should be exploring the intersection of these new technologies, including ubiquitous internet, distributed computing (76 percent of people in advanced economies and 45 percent of people in emerging economies now have smartphones),4 blockchain and cryptocurrency, and the tokenization of everything. Companies should form emerging technologies working groups, conduct red teaming exercises to identify business risks, and bring in outside experts to help them thrive during these changes.
The tokenization of everything. “The tokenization of assets refers to the process of issuing a blockchain token that digitally represents a real tradable asset.”5 Any brand can tokenize their “economy,” and anything that is tradeable will be tokenized. Why? Because a tokenized economy is more liquid, allows for faster and cheaper transactions through automation and smart contracts, creates more transparency, and radically increases accessibility. Whether art, real estate, luxury cars, rewards programs, customer experiences, or financial services projects of all sorts, the tokenized economy is being built right now. Bitcoin itself is tokenized value on the Bitcoin blockchain. I can “settle” a multimillion-dollar Bitcoin transaction within 60 minutes right now, completely independent of any third party, with confirmation of the transaction within 15 minutes. Try that with gold. Or fiat currency.
Ostriches don’t really bury their heads in the sand. Will you? Companies will increasingly place non-operations treasury in assets like Bitcoin,6 especially if inflation takes hold and grows. Workers will increasingly ask for compensation with crypto instead of fiat. Crypto will see its use in everyday transactions increase, with currency such as stablecoins pegged to a “stable” asset like the dollar, and with technologies such as the Bitcoin Lightning Network as a channel for commonplace transactions. Customers will flock to decentralized, tokenized economies and financial products that offer increased access, transparency, lower costs, and better experiences. Virtualization and the metaverse—concepts that are less alien now that we’ve all grown accustomed to meeting virtually—will require digital stores of value, native to a ubiquitous internet.
Governments will make choices. China has already chosen, with its ban on Bitcoin mining, most likely to hedge against competition to its own digital currency. In doing this the Chinese government has effectively offshored private sector innovation in favor of state control. Dozens of countries are exploring government-issued digital currencies called “central bank digital currencies” or CBDCs. Certainly, countries like the U.S. will find their own digital currencies irresistible. After all, companies like Venmo and PayPal are now required to report annual payments in excess of $600 to the IRS,7 which shows the thirst for government visibility of personal finance. Quite simply, CBDCs promise new levels of financial intelligence that are impossible with cash economies. Ultimately, countries like the U.S. will need to decide whether the promise of these technologies in the private sector will be embraced or instead stifled, regulated, and offshored. My bet is once again on the honey badger—the internet is increasingly everywhere, always, and data is free speech. I don’t expect “bans” will accomplish much ultimately, except send innovation elsewhere in the world.
Honestly, crypto isn’t scary. Planning, red teaming, and risk assessments exist for a reason. These very familiar business activities aren’t suddenly incompatible with the tokenized economy. Considering banking a crypto mining company? Conduct a risk assessment, mitigate against any revealed risks, and get to work. Want to understand how your company will be affected by the tokenized economy? Bring in experts. Plan and conduct red teaming exercises. Already in the tokenized economy and considering new offerings? Quality risk assessments aren’t just linear exercises, based solely on volume, but should be based on a real understanding of the offering’s underlying technology, its use cases, its demographics, and how companies can capture value while effectively mitigating risk. One-size-fits-all risk assessments do very little.
Crypto and crime. Yes, criminal use of crypto is real. It’s use in ransomware is a growing and insidious problem. That said, 2020 data shows that only 0.34 percent of crypto activity was dedicated to criminal activity, compared to the 2 to 5 percent of global fiat currency GDP that is connected to illicit activity.8 Remember: The blockchain is immutable and perpetual. I’ve worked on blockchain analysis projects in 2021 where my team investigated suspicious transactions from 2017 and earlier, drew appropriate conclusions, and reported our findings to authorities. Does fiat offer that sort of transparency?
The Takeaway
My overall message: These technologies are here, and they provide enormous opportunities for companies, but also risks if they are ignored or improperly managed. As the influential venture capitalist Marc Andreessen once pointed out, software ate the world and gave birth to companies like AirBNB, Facebook (now Meta, reflecting its effort to shape the future), Uber, Alibaba, and so many more that have disrupted entire industries. Like natural laws, if exchanges between humans can be flattened, decentralized, democratized, automated, and virtualized, they will be. Are you ready?
2 https://www.cnbc.com/2021/08/18/new-cryptocurrency-bitcoin-user-global-map.html
3 https://crypto.com/images/202107_DataReport_OnChain_Market_Sizing.pdf
5 https://www.wyoleg.gov/InterimCommittee/2019/S3-20190506TokenizationArticle.pdf
6 Yes, Bitcoin is volatile, but over time to the upside, on average 120 percent annually. It is the original crypto asset, well tested over more than a decade, but it is still new … and energetic. Volatility is a marker of this energy.