How can crypto become the finance of the future?

Throughout history, people have sought refuge in gold during times of economic instability. Today, a similar trend is emerging with Bitcoin, as some see it as a safe haven, while others believe it could revolutionise the financial system and become the global monetary standard. Is cryptocurrency the answer, and will it become the finance of the future? Here are some compelling reasons why this could indeed be possible.

In recent years, the global economy has gone through sharp rises in inflation and the cost of living. In the UK, for instance, electricity and gas prices surged, and the costs of everyday essentials like fuel and food have risen significantly. This economic strain has been compounded by geopolitical tensions, such as the ongoing conflict in Ukraine, which has disrupted global supply chains and driven up prices further.

Traditional investments in forex, stocks, and shares are considered safer options, but cryptocurrencies like Bitcoin are increasingly seen as viable alternatives that can potentially yield higher returns in a shorter period. According to the International Monetary Fund (IMF), Bitcoin is no longer just a fringe digital asset but has started to correlate with traditional financial markets. Despite its volatility compared to stocks on the S&P 500 index, Bitcoin offers a high risk-reward potential that can be appealing to investors.

Cryptocurrency can empower individuals, particularly in regions with political instability or where traditional banking services are inaccessible. In such areas, crypto provides a means to control one's own money without reliance on banks.

For instance, during the conflict in Ukraine, crypto donations provided significant support, with over $100 million donated following a government appeal on social media. This ability to quickly and securely transfer funds using a mobile phone makes cryptocurrency a valuable tool for humanitarian and philanthropic efforts.

As inflation continues to affect the housing market, with UK house prices being down-valued and mortgage affordability calculations being adjusted, cryptocurrency is emerging as a new form of collateral.

Companies like Milo, Ledn, and Figure Technologies are now offering mortgage loans backed by Bitcoin, eliminating the need to sell the cryptocurrency. These 30-year, 100% loan-to-value (LTV) mortgage loans represent a significant shift in how assets can be used for financial security.

Additionally, companies like Nexo are offering 0% interest loans backed by 2-3x crypto collateral, with no need for credit checks. This is beneficial for those with poor or no credit history. In a significant move, Goldman Sachs recently offered its first Bitcoin-backed cash loan, indicating a growing acceptance of crypto assets in traditional finance.

Nexo has also partnered with Mastercard to launch the first crypto-backed credit card, offering advantages such as no monthly fees or minimum repayments and 0% interest if borrowing remains below 20% of the LTV.

Despite the clear benefits, several obstacles hinder the mainstream acceptance of cryptocurrency. Regulatory uncertainty is a major issue, as governments around the world struggle to formulate consistent policies. In the UK, the Financial Conduct Authority (FCA) has been cautious, often highlighting the risks associated with crypto investments.

In a recent report issued by the FCA, they confirmed that 349 firms had applied for a UK crypto licence since 2020 but only 47 to date had been granted on (just 14% of applications received).

Volatility remains a significant barrier. The price of Bitcoin and other digital assets can fluctuate wildly, making them less reliable as stores of value. This instability can deter both individual investors and businesses from using cryptocurrencies for everyday transactions.

Security is another concern. High-profile hacks and fraud cases have damaged the reputation of cryptocurrencies. Ensuring robust security measures and building trust among users is essential for wider adoption. Additionally, the technical complexity of managing digital wallets can be daunting for the average person, necessitating better user education and simpler interfaces.

Public perception and understanding of cryptocurrencies are still evolving. Many people view them as speculative investments rather than practical financial tools. Comprehensive education and awareness campaigns are necessary to demystify cryptocurrencies and highlight their potential benefits.

Regulation will play a crucial role in shaping the future of cryptocurrencies. While excessive regulation could stifle innovation, a balanced approach can provide the stability and security needed to foster wider adoption.

The UK government and the FCA are working towards creating a regulatory framework that protects consumers while encouraging innovation.

A clear and consistent regulatory environment could attract institutional investors, who are currently hesitant due to legal uncertainties. It could also facilitate the development of new financial products and services that integrate cryptocurrencies, bridging the gap between traditional finance and the digital asset economy.

Technological advancements are critical to driving the adoption of cryptocurrencies. Blockchain technology, which underpins most digital assets, continues to evolve, offering improved scalability, security, and functionality.

Innovations such as smart contracts and decentralised finance (DeFi) platforms expand the use cases for cryptocurrencies, making them more versatile and accessible.

Layer 2 solutions, like the Lightning Network for Bitcoin, address scalability issues by enabling faster and cheaper transactions. These developments are essential for making cryptocurrencies practical for everyday use and increasing their appeal to a broader audience.

One major criticism of cryptocurrencies, particularly Bitcoin, is their environmental impact. The energy-intensive process of mining Bitcoin has raised concerns about sustainability. However, the crypto industry is exploring more eco-friendly alternatives.

Proof-of-stake (PoS) consensus mechanisms, used by cryptocurrencies like Ethereum 2.0 and Cardano, are significantly less energy-intensive than Bitcoin’s proof-of-work (PoW) model. These alternatives could help mitigate the environmental impact and improve public perception of cryptocurrencies as a sustainable financial option.

As financial giants like Mastercard and Goldman Sachs embrace cryptocurrencies, digital assets are becoming more mainstream. Moving money from deflating fiat currencies to cryptocurrencies could be a strategic investment. However, for crypto to truly become the finance of the future, several challenges must be addressed, including regulatory uncertainty, volatility, security concerns, and public perception.

Technological advancements and a balanced regulatory approach are crucial in overcoming these obstacles. As the crypto industry continues to evolve and mature, it has the potential to reshape the financial landscape, offering greater financial independence, innovative financial products, and a more inclusive global economy.