It happens gradually, over time. But the whole cryptocurrency industry is starting to look (and sound) exactly like the industries it was created to displace. What is even stranger is that cryptocurrency proponents are cheering on the takeover, without realizing that transacting cryptocurrency through trillion-dollar institutions, such as Fidelity, are misaligned with the goals of distributed ledger technology.
Back to basics
In the beginning, it was understood that there was a stranglehold on the financial market, where money was not backed by anything and, once printed, never really found its way far past the top 1%. It would be impossible to distribute wealth fairly in the current economic paradigm. To stop this monopoly, a white paper was released outlining the workings of a new cryptocurrency, known as bitcoin. And it has been a tremendous success. People who would have had to spend their lives earning wealth in a controlled setting were finally given something of a break. Millions more were the indirect beneficiaries of the coin, either through crypto donations or through the use of the coin when disadvantaged by the banking system. Companies such as Paxful were created that aimed to help people without a bank account gain access to finance, and people had pure control over their finances for the first time.
The grassroots process of using bitcoin as a means of exchange without having to go through a centralized conglomerate demarks a revolution on an individual basis, where people are not obligated to use a controlled infrastructure. A simple explanation is that cryptocurrencies were designed to empower individuals at the expense of corporations and governments, which is why they have been battling it so vehemently with coordinated attacks. While the tactic of misinformation against bitcoin and blockchain, in general, was an abject failure, the strategy of merging cryptocurrencies into the existing infrastructure is proving much more fruitful, and far harder to resist.
If you can’t beat them, make them join you
Now we are at a stage where bitcoin futures and other products are coming into force. It’s starting to look professional, streamlined, fulfilling of all regulatory requirements and appealing to institutional investors. In other words, it is starting to look like the same thing it was intended to replace. We are witnessing the ‘professionalization’ of cryptocurrency, where third-parties, lawyers, custody solutions, consultants, and accountants are needed to manage the complexity of these new digital assets. Most seem to have forgotten that it is these types of positions that distributed ledgers have been designed to replace. This fact is lost amid hype and market speculation.
Sophisticated trading products are entering the mainstream crypto vernacular, which will inevitably allow institutions to practice the ‘art’ of rehypothecation. Don’t let the name fool you – it’s just another form of fractional reserve banking, where institutions can borrow 100 BTC while only owning 1 BTC.
Instead of working on deleveraging the existing fiat financial derivative mess, a new one is being created based off of the decentralized asset class. Constructing a derivative market from a sound asset is the easiest way to manipulate it. Only funds and institutions trade derivatives at a large scale and any derivative market is going to dwarf the trade of the underlying asset itself. There is a fixed supply of BTC and an infinite supply of derivatives, so regular users have no say on how the price of bitcoin is being manipulated at the derivative level.
Institutions taking over the market
Some large players are now entering the crypto field. Bakkt, owned by ICE, which in turns owns the NYSE and has significant ties to JPM, is launching bitcoin futures on December 12th. Starbucks and Microsoft are also contributing to the Bakkt platform. Forbes launched their cryptocurrency aggregate site with indices and news items. They also intend to release specialized cryptocurrency indices. Enterprise level solutions are starting to proliferate, and there is strong evidence that institutions have been investing in OTC cryptocurrency products for quite some time, despite making no official statements and even publicly criticizing the technology. A Bitcoin ETF is eagerly awaited by many who anticipate a price increase in the underlying commodity, and the passing of a Bitcoin ETF is more of a question of when not if. Fidelity investments are possibly the largest entry into the space as they have trillions of dollars under active management.
While this is all heralded as being positive news for the crypto ecosystem, the reality is that cryptocurrency is simply mimicking fiat. It was originally intended to replace government intervention of all kinds and to break up existing monopolies. No regulation, no market manipulation, and no traceability. Somehow, in the ten years since bitcoin was created, many of its supporters seem to be cheering on the transformation of the cryptocurrency into a valueless derivative traded between institutions, along with the associated regulatory and legal complexities which funnel more resources away from regular citizens.
On a more positive note, Bitcoin and the DLT industry is, in general, thriving. Small-scale adoption by businesses across the globe could ensure that bitcoin becomes an unofficial yet universally accepted cryptocurrency around the world. Ultimately, while institutions are doing their best to strangle cryptocurrency and merge it into their existing infrastructure, the antifragile technology is one that gets stronger as time goes by. In contrast, derivative systems with no underlying foundation can only fail.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.