“Opportunity amidst tragedy” would likely be the most suitable phrase to summarise the journey of cryptos during the Global Pandemic- with disruption taking a toll on people and economies, and physical proximities massively restrictred, cryptos have outshone traditional assets, by virtue of its inherent features- easy liquidity, access and digitalisation.
Further, as countries around the globe attempt to stimulate their economies by opening floodgates of liquid funds, the ‘digital natives’ have and are expected to increasingly venture into adventure-some investments- think, cryptos. And while such adventurous investing may be short-lived, the results may infact have a long-lasting impact- it is this expected impact that has sets the ‘bull’ stage for cryptos in times to come.
In this brief note, we cover the recent highlights and developments in the crypto-industry, also discussing developments in the relatively new concepts of stablecoins, crypto-lending.
A rising Crypto-market in India
Closer home, merely three weeks before the COVID Pandemic brought the world to a ‘lockdown’, the Hon’ble Supreme Court of India, in its order dated 4th March, 2020 marked the re-birth of Crypto-trading in India after the RBI Circular dated 6th April, 2018 had virtually showed crypto-trading the exit door.
With the SC’s order inculcating positive sentiments amongst the Indian market players, performance and trends in the crypto-industry, amidst the struggling economies has been rather noteworthy- Several reports and numbers suggest that local crypto-trading, especially on peer-to-peer exchanges has peaked, with several old and new crypto-exchanges being launched, re-launched as a direct impact of the Supreme Court Order. Further, Bitcoin trading volumes in India have surpassed the spike of December’ 17, when the digital currency was enjoying an unprecedented bull run globally.
The SC order has also set the stage for several global players to establish crypto-currency exchanges in India. For instance, the global cryptocurrency exchange aggregator Coinswitch is reportedly launching a crypto trading app for Indian users under the name and style of Coinswitch Kuber.
Having said so, it cannot be overlooked that the Indian framework still lacks a sound and definite regulatory backing for the crypto-industry. This absence of regulatory framework or even a definite classification as money, commodity or goods has resulted in risk averse entities continuing to voluntarily following the ban imposed by RBI. Market players and related stakeholders have also expressed concerns rising due to absence of any framework at all.
While the global stocks have had to bear the brunt of falling prices and reducing volumes during the initial stages of the lockdown, trading volumes in crypto-currencies, on the contrary have increased manifold. However, the increase in value has also featured its (in)famous significant volatility- as per latest exchange rates on CoinDesk, the between the 6 month’s period from 1st January, 2020 to 30th June, 2020, the value of one Bitcoin has ranged from USD 10,367.63 to USD 4,944.70. As on 2nd July, 2020, the value of 1 bitcoin is equivalent to USD 9,240.87 ~ INR 690,418.30. Similarly, in the first 6 months of calendar year 2020, the value of one Etherum has varied from USD 284 to USD 107.90, currently standing at USD 230.70 ~ INR 17,183.28
In another milestone, a report by Dune Analytics suggests that June trading volume on decentralized exchanges set a record high of $1.52 billion, up 70% from May’20.
Hence, it is seemingly clear that the markets as on present date hold a relatively positive outlook for bitcoins, with more and more economies adopting crypto-friendly mechanism and widening acceptance of cryptos. That being said, we must understand that this boost cannot be accredited solely to some exchanges, or bitcoins and accepting economies- a larger part of this success is also a result of the newer innovations like Stablecoins and Crypto-lending.
Global Stablecoins (GSCs)
Suggestive of its name, ‘Stablecoins’ are crypto-assets that aim to maintain a stable value relative to a specific asset, or a pool or basket of assets. It attempts to address the high volatility of the traditional crypto-assets (think Bitcoins), by tying the stablecoin’s value to one or more other assets, like sovereign currencies. International Regulatory Bodies like Financial Standards Board, Basel Committee on Banking Supervision, Financial Action Task Force, Committee on Payments and Market Infrastructures (CPMI) and G7, have recognised stablecoins as having the potential to bring efficiencies to payments and promote financial inclusion.
While introduced in 2018 itself, GSCs came into the limelight in the testing times of the COVID crisis. Identified as an ‘opportunity in tragedy’ focus was laid on GSCs as they showed potential of enabling faster and hassle-free payments and remittances across the globe which would have otherwise taken hours or days to be processed via traditional payment system.
While International Bodies like FATF, G20 are under the process of framing regulations to avert the risks while reaping optimum benefits, the expected roll-out of Facebook’s Libra, a currency-backed stablecoin, which is expected to have a potential user base of nearly 170 million in the United States alone. Depending on how well this model is adopted and allowed by government regulators, it is expected that Libra could well mark the point at which cryptocurrency goes mainstream.
Of the developments we discuss in this Note, the most recent one is ‘crypto-lending’. Marking the most direct nexus with mainstream finance, Crypto-lending allows borrowers to use their crypto assets as collateral to obtain a fiat or stablecoin loan, while lenders provide the assets required for the loan at an agreed-upon interest rate. This can also work in the reverse, where borrowers use fiat or stablecoins as collateral to borrow crypto assets.
Available on centralised as well as decentralised platforms, Crypto-lending is conceived as a massive opportunity for crypto markets and users, which have traditionally had two options regarding how to use their crypto: hodl or trade.
Quite evidently, centralised lending platforms act more like traditional fintech companies that happen to work with cryptocurrency, and follow traditional processes like KYC norms. As such, interest rates are determined by the company, which often include notably higher returns for lenders of crypto assets like Ether (ETH) and Bitcoin (BTC). Whereas, decentralized governance system determines the interest rates, these decentralized platforms have variable interest rates determined by supply and demand for an asset on the platform, as a result of which the decentralized platforms tend to see high stablecoin interest rates (7%–15%) and lower rates for crypto assets like ETH and BTC (0%–1%), while centralized platforms offer more favourable rates for those crypto assets (2%–6%).
While lending would be the most basic utilisation of this lending arrangement, another significant benefit is that of ‘rate arbitrage’ – it refers to the process of taking out a digital currency loan from one lending source, which has a low interest rate, and then reinvesting that same crypto sum elsewhere to earn a higher rate of interest
Crypto and 2020- Trends to look for
In light of the discussion above, notable events, trends and developments expected in 2020, that are likely to shape the crypto-industry are-
1. Halvening of Bitcoins
Occurring almost every 4 years, the Bitcoin Halvening, expected to come up soon is a key aspect of the bull case for Bitcoin in 2020. Bitcoin Halvening is a process whereby the number of new Bitcoin generated around every ten minutes is cut in half. David Steen, analyses that past halving events have shown that a price increase is bound to occur after each halving. In fact, technical analysts suggest thresholds as high as $50,000 -$250,000 by considering past growth cycles fuelled by halving events.
2. Introduction of Facebook’s Libra
As discussed earlier, roll-out of Facebook’s Libra is expected to have a significant impact on the crypto-industry. While it is difficult to predict whether Libra will witness field-success, it is likely that Libra will heavily-stimulate the crypto market, as it proceeds to introduce 1/3 of the world to digital currencies.
3. Increasing Crypto-friendly Regulations
Governments around the world are now aware that turning a Neslon’s eye to the fast-paced crypto-industry would only pull them down in the global race; and as such, crypto-friendly laws are increasingly being introduced in several economies, aiming to achieve an optimal trade-off between risk protection and innovation adaptation that cryptos bring.
A controlled, yet positive outlook
All having being said, it is expected that with sufficient regulatory breaks and relaxations, cryptos will indeed see some interesting trends in 2020 and the near future. While its volatility may raise some concerns, recent mutated adoptions of cryptos are expected to take care of the same.
 In the matter of Internet and Mobile Association of India v. Reserve Bank of India
 Bitbuddy, Tradehorn
 As on 2nd July, 2020
 As on 2nd July, 2020
 Consultative Document dated 15th April, 2020- https://www.fsb.org/wp-content/uploads/P140420-1.pdf
 Reader may also refer to our detailed article on Global Stablecoins, available at- http://vinodkothari.com/2020/04/the-rise-of-stablecoins-amidst-instability-gsc-covid/
 Hodl is term derived from a misspelling of “hold” used in the crypto- community for holding the cryptocurrency rather than selling it.
 Updates interest rates are available at- https://interest.coinmarketcap.com/currencies/ethereum
 At Morgan Hill Partners
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