A report into the risks and opportunities of cryptocurrency by the Rome Business School
In their latest study, our colleagues at the Rome Business School discuss cryptocurrency and the several risks but also opportunities for banks as well as individuals.
We’ve known for a while that cryptocurrencies are a new money paradigm. When crypto first broke into the scene, it carried the promise of simplifying existing financial architecture to make it faster and cheaper. But the absence of clear regulation has always left the door open to fraud, speculation, and instability.
The RBS study notes that, despite well-reported losses generated by major cryptocurrencies in recent months, the crypto market won’t stop growing. In fact, this year will see an increasing number of traditional financial institutions offering cryptocurrency products and services.
Over the past few years, the total market capitalisation of all cryptocurrencies has grown significantly. According to CoinMarketCap (2023), this value has increased from around $19.5 billion in January 2017 to $2.5 trillion in 2022, and the figure is expected to reach $10 trillion this year. This constitutes an astonishing growth when you consider that in 2017 the number was just $100 million and there were 800 different cryptocurrencies. By 2021, there were already 8,000; in 2023, it is estimated that there will be more than 20,000 different currencies (2022 Global State of Crypto, Gemini).
Currently, Bitcoin remains the world’s most expensive currency (worth 429 billion), although it’s soon expected that its dominance will fall below 50 per cent. Among the most valuable cryptos are Ethereum (EUR 189 billion) and Tether (EUR 66.5 billion), which remain among the major ones despite drops in 2022. Bitcon lost more than 60% of its value, Ethereum 64% and, overall, there has been a more than 90% drop in the value of the other major cryptocurrencies.
Regulation remains a thorny issue. Currently, there is no international consensus on the regulation of cryptocurrencies, but governments around the world are moving to develop clear rules and create their own digital currencies themselves.
In China, the government has been testing a digital version of the yuan since 2021, which is increasingly being used domestically. In contrast, the digital dollar, by the US Federal Reserve, and the digital euro designed by the European Central Bank are still in the development phase. While the development of cryptocurrencies issued by central banks could have significant benefits, it could also create challenges for the large-scale cryptocurrency market. Indeed, the RBS report shows that regulation is a double-edged sword for companies operating in this sector: more regulation could reduce their room for manoeuvre, but also provide more stability and legitimacy to the market, helping to attract more institutional and retail investors.
A digital currency issued by a central bank has multiple advantages. As one of the RBS report’s authors writes: such currency ‘would be able to act as a medium of exchange, unit of account and store of value in an era when cash is becoming less and less relevant. It could also help financial institutions reduce the costs associated with handling physical cash and increase the transparency of transactions’ (Valerio Mancini).
More regulation would also reduce crime and money laundering through crypto exchanges. According to Chainalysis’ Crypto Crime report (2023), hundreds of illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022, an increase of +68% compared to 2021.
That’s only malfeasance but causes instability too. Just think of FTX: a major cryptocurrency exchange platform that collapsed in 2022, causing an unprecedented disaster in the market and undermining the confidence not only of investors but even criminals.
In conclusion, due to the risks associated with their use, the current macroeconomic environment tends to view cryptocurrencies more as an alternative asset than a true substitute for fiat currencies issued by central banks. Instability rather than rules and sanctions are currently the real Achilles’ heel of crypto: a financial instrument with enormous potential and capable of building an empire, but also of collapsing like a house of cards after a mere blow.
You can find out more about the report and the work conducted at the Rome Business School research centre here.