The Cambridge Centre for Alternative Finance (CCAF) has just published their second annual report on cryptocurrencies and the digital asset ecosystem. The Global CryptoAsset Benchmarking study is a must read for any industry participant and policymakers engaged in the regulatory oversight of cryptoassets as the research covers practically every aspect of the crypto industry.
CCAF collected data from the most active participants in the crypto sector. This included approximatley 180 different entities in 47 different countries.
Designed to provide a snapshot of the evolution of crypto the report delivers unique insight into a sector of Fintech that did not even exist until a few years ago.
Writing the forward for the crypto report, Dr. Robert Wardrop, Director of CCAF, explained their mission:
“Our goal from the outset was that these periodic reports would become a valuable reference for a wide audience of actors in the financial system, including disruptive product and service innovators, incumbent financial services firms, investors, academics, regulators and policymakers, and the general public. Each of these constituents deserves to be heard in debates about financial innovation, and few finance innovations have been as controversial and attracted as much misinformed opinion as the developments associated with cryptoassets. Our aim is to inform these voices by providing empirically-based evidence of developments to provide common points of reference to build upon. Sometimes this challenges prevailing wisdom.”
Cryptoassets rocketed to global prominence in the past few years. First, as a digital currency in the form of Bitcoin and, more recently, the initial coin offering (ICO) craze captured the interest of millions of investors (or speculators) and individuals seeking access to capital. The industry jumped “from $30 billion to more than $800 billion at its peak in early January 2018, until coming down again to hover at around $200 billion.” Billions of dollars have been raised globally in the form of ICOs.
Crypto: Mining, Exchanges, Storage, and Payments.
The Benchmarking report categorizes four key industry segments: mining, exchange, storage, and payments.
The researchers, led by Michel Rauchs, who is the Cryptocurrency and Blockchain Lead at CCAF, revealed six major findings, summarized below:
- There are millions of new users with accounts at service providers topping 139 million, growing 4X in 2017 and doubling in 2018 (by Q3). While growing rapidly, most users are passive with only 38% of users considered to be active.
- Crypto focused firms are increasingly operating across segments with “57% of cryptoasset service providers are now operating across at least two market segments to provide integrated services for their customers, compared to 31% in early 2017.”
- Multi-coin support has nearly doubled from 47% of all service providers in 2017 to 84% in 2018. This trend has been fueled by common standards such as ERC-20 on Ethereum.
- The majority of crypto mining facilities use at least some renewable energy sources. As of mid-November 2018, the top-6 proof-of-work (PoW) cryptoassets collectively consume between 52 and 111 TWh of electricity per year. The mid-point of the estimate (82 TWh) is the equivalent of the total energy consumed by the entire country of Belgium – but also constitutes less than 0.01% of the world’s global energy production per year.
- Mining is less concentrated geographically than perceived
- The industry is pursuing self-regulation and is a sign of maturity as the sector professionalizes.
Regulation and compliance is key to long-term sector growth. The report states that crypto is becoming more intertwined to the highly regulated traditional financial ecosystem. This is due in part to both better tech and regulatory clarity. Yet just 5% of cryptoasset-only service providers are licensed in their jurisdiction and 39% of fiat supporting services hold licenses.
Some other points of interest uncovered in the CCAF crypto report:
- More than $1.5 billion has been stolen from cryptoasset exchanges and storage providers alone to date.
- There is a lack of transparency on both external and internal security audits: more than 80% of crypto firms do not publicly share information about security audits.
- The share of transactions over $1000 for cross-border payments processed off-chain rose from 34% in 2016 to 46% in 2017.
- 38% of fiat supporting crypto services have closed a location due to regulatory actions
CI reached out to Michel Rauchs for some additional feedback in his crypto research.
“We must distinguish between asset value (cryptoasset “market capitalisation”) and industry value (i.e. the combined value of industry actors). While the former has been volatile since its inception and has gone through multiple bubble-like cycles, the latter has consistently grown over time,” said Rauchs. “The bear market presents a good opportunity for companies and organisations to build capacities, further develop core infrastructure services, and drastically improve the user experience.”
There is an ongoing industry debate regarding the concept of a utility token while security tokens have more recently captured headlines. Rauchs pointed to the fact that many token sales (ICOs) have violated securities regulations by selling tokens to unaccredited investors in return for a bundle of (often non-enforceable) rights in a project that did not exist yet.
“There is a general trend towards “security tokens”, which are essentially traditional securities (i.e. financial agreements between parties) but in the form of a blockchain token. Utility tokens, on the other hand, are digital assets that, just like cryptocurrencies, play an essential role in the functioning of the underlying public network: they act as a coordination mechanism to align interests of diverse participants.”
Mining is another hot topic of discussion.
The report indicates that mining is more distributed geographically than thought. Rauchs said their data shows that mining control is less concentrated than commonly perceived: They identified more than 60 operators of large hashing facilities distributed over the world. Rauchs said the picture looks different from one cryptoasset to another, however, it appears that hashpower ownership is more distributed than before, although there certainly are actors that occupy a dominant position.
Rauchs is also of the opinion that proof-of-work (PoW) mining will always stay a fundamental component of Bitcoin the system, and ultimately Bitcoin the digital asset. As long as it remains profitable to mine PoW coins, miners will run their machines.
We asked about the shortfalls in cybersecurity and compliance as there have been many stories of crypto thefts and poor security protocols. Rauchs explained that custodial exchanges hold large amounts of customer funds. Since P2P cryptoasset transfers are irreversible, criminals and thieves have a large incentive to compromise these honeypots and steal digital assets.
“It is thus not surprising that cybersecurity is considered the key challenge. With regards to compliance, we can observe that an increasing number of cryptoasset-only service providers are building out compliance teams and perform KYC/AML checks. Self-regulatory initiatives also seem to be en vogue,” stated Rauchs.
And what about jurisdictions of preference for cryptoassets, such as Gibraltar and Switzerland? Will these nations continue to garner both attention and traction?
“Our data does not indicate that cryptoasset activity measured beyond trading volumes and fundraising is significantly higher,” Rauchs stated. “However, there have been cases of large cryptoasset service providers moving to jurisdictions perceived to having a friendlier approach. Some regulatory arbitrage can be observed, but most service providers primarily serve domestic customers.”