Bankchain Briefing: Highlights from CoinDesk’s Annual Crypto Review

Fear not – I have just the solution for you. I asked the authors of the report, George Kaloudis and Teddy Oosterbaan – both research analysts at CoinDesk – to help us make sense of the report’s main findings and give us a taste of what new developments we can expect from the industry this year.

Here’s my conversation with George and Teddy.

1. What would you say is the most important takeaway from this report, particularly for people who are still new to crypto?

2021 was an extraordinary year for crypto and blockchain. Retail got involved in a big way in 2020, and institutions followed suit last year. Now that there is a lot of institutional money at stake, the crypto industry has moved past the experimental phase into a phase where it can be developed into something useful for the broader financial system. Although there’s no guarantee that a specific project will have staying power, it is virtually a guarantee that bitcoin, ethereum and top altcoins will be around for at least the medium-term.

2. What, for you, were some of the biggest industry highlights in 2021?

Here are some that immediately come to mind:

(i) El Salvador making Bitcoin legal tender. This declaration came to fruition in September when a law that stipulated that bitcoin must be accepted as a form of payment everywhere in the country went into effect. A commitment was made to use the Lightning Network, the commerce layer for Bitcoin, to enable a more frictionless bitcoin economy. This ultimately led to an explosion of growth in the Lightning Network, injecting renewed life into the digital cash use case for Bitcoin.

(ii) Record VC funding in capital raises. According to research from Blockdata, $23 billion of funding reached crypto companies in 2021, which is more than the total amount raised from 2017 to 2020. We even saw a $1 billion capital raise in December for NYDIG, and FTX raised more than $1 billion across two funding rounds.

(iii) Record prices for almost every cryptocurrency. The entire crypto market cap grew 185%, from $773 billion to $2.2 trillion.

(iv) DeFi TVL hit $215 billion, and NFT monthly trading volume consistently remained in the billions of dollars.

(v) Ethereum saw major improvements, including EIP 1559 upgrading Ethereum’s fee market, and the impending transition to proof-of-stake. Both events play important roles not only in the growth of Ethereum as a technology, but also in developing a narrative for Ethereum’s native asset.

3. How do you think DeFi and crypto will influence the world of banking and fintech in 2022?

Crypto and DeFi have already started competing with banking and fintech companies in a couple of key areas. One of these is payments and cross-border transactions. Sending bitcoin, ether and stablecoins from one wallet to another anywhere in the world is extremely easy, efficient and transparent. Transaction fees on major blockchains are currently too high, but layer 2 scaling solutions could explode in usage this year.

Another key area is lending and trading markets. DeFi has attempted to cut out the “middleman”, which most often refers to banks, exchanges and other fintech providers. Users are now capable of providing collateralized loans and making a market for digital assets, earning both trading fees and lending interest. DeFi protocols often take a small cut of supply side fees, while letting everyday users reap the rest of the benefits.

4. Do you see DeFi and TradFi merging this year?

We are at the earliest stages of integration between DeFi and TradFi, with crypto native companies and hedge funds making up the bulk of institutional on-chain activity. Companies like Celsius, Crypto.com and Fireblocks have an obvious advantage over traditional financial institutions as their infrastructure is already built out. A complete integration is likely several years away due to legal, UX and infrastructure issues.

Regulatory compliance is arguably the most important issue for the merging of the two industries, with some governance tokens being obvious unregulated securities and certain platforms acting as unregistered banks. Regulation within DeFi may be generally impossible given the decentralized and worldwide nature of the industry, but platforms like Aave Arc and Compound Treasury can lead the way in creating DeFi products for compliant institutions.

Chart of the week

Roughly a quarter of American adults believe that cryptocurrencies will replace fiat currency, according to a recent survey conducted by Finder.

Older generations are the most skeptical of digital currencies. 95% of the silent generation believe that fiat will always dominate, followed by baby boomers (91%) and Gen X (71%).

Millennials are the leading generation to believe that crypto will replace fiat, with 38% responding “Yes”, compared to 35% for Gen Z.

The survey also finds that a lack of understanding is the reason why 50% of Americans have not invested in cryptocurrency in the past. But what would convince them to invest?

Findings suggest that financial literacy is the key to gaining new investors. 37% of Americans say they would invest in crypto if they better understood how it works. Other important factors that would convince people to invest are the ability to buy everyday items or pay bills with crypto (35%), making crypto accessible through traditional institutions such as banks (31%), and stronger support from the government (29%).

Meanwhile, a quarter of Americans (26%) say that nothing could make them want to invest in cryptocurrencies. Ouch.

What we’re reading

• Rethinking the longevity of cryptocurrency’s pay-for-processing model (TechCrunch)
• Andreessen Horowitz looks to raise $4.5 billion for new crypto funds (CoinDesk)
• Walmart filings reveal plans to create cryptocurrency, NFTs (Bloomberg)
• Facebook and Instagram may help you create and sell NFTs (TechCrunch)
• Gemini introduces prime brokerage following second acquisition in a week (CoinDesk)
• Miami-based fintech Milo is offering 30-year 'crypto-mortgages' (Cointelegraph)
• FTX launches $2 billion fund to back Web3 startups (Finextra)
• Ramp explains how its early adoption of stablecoins increased corporate treasury returns (Crowdfund Insider)
• Gemini acquires crypto asset management platform Bitria (CoinDesk)
• Coinbase wades into crypto derivatives with deal for futures exchange (FT)
• Robinhood moves to permanent remote work (Finextra)
• B2B crypto services startup Zero Hash raises $105 million (The Block)
• US banks form group to offer USDF stablecoin (CoinDesk)