Crypto Insights: Origins and Growth of Cryptocurrency

HOW DID CRYPTOCURRENCIES BEGIN?

Before cryptocurrency, almost all electronic payments and large-scale financial transactions necessitated an intermediary – such as a bank – to facilitate the transaction. While these intermediaries are there to ensure safe and timely settlement and recordkeeping, this support creates additional costs. While still very much the dominant model for payments globally, criticism of this system mounted in the early 2000s and culminated during the 2008 financial crisis, leading many to desire a new financial option that was more transparent and seamless.

As an alternative to the traditional, global financial system, Satoshi Nakamoto, the pseudonym of an unknown Japanese entity, published a white paper proposing a new peer-to-peer electronic cash system called Bitcoin. Nakamoto’s goal was to create a currency that operated without a central authority or bank; instead, this cryptocurrency would be a form of decentralized finance, or “DeFi.” To ensure security without third-party entities watching over, cryptocurrency would rely on blockchain technology.

Blockchain is a form of record-keeping that stores the transaction history for each crypto coin, thereby creating a timestamped digital ledger. This ledger holds data for every action in a hash – a cryptographic algorithm used for security – of a block of items. With each new entry, all previous data is reinforced, forming a chain and therefore a record of transactions to reinforce security and ultimate ownership.

While Bitcoin’s use of blockchain technology was revolutionary, many new cryptocurrencies have since been created, seeking to distinguish themselves by making improvements or providing unique capabilities as compared to Bitcoin. These cryptocurrencies are called altcoins; some of the most popular are Ethereum, Litecoin, and Cardano. You may have also heard of memecoins. These are altcoins that were created to resemble a meme and capitalize on internet popularity to reach a high market capitalization quickly. Therefore, memecoins like Dogecoin are often more volatile than traditional cryptocurrency because they generally prioritize reaching high market capitalizations rather than use cases.

WHY ARE THEY TRENDING?

The number of cryptocurrency exchanges has been expanding and gaining popularity. Some of the most popular exchanges are Binance, Robinhood, and Coinbase. Until recently, crypto was driven by retail investors. But increased trade volumes are now drumming up interest and support from traditional, institutional players, in part based on their own experimentation with blockchain technology. These include the likes of: JPMorgan Chase, which is preparing to offer an actively managed bitcoin fund to clients; Fidelity Investments, which intends to launch its own bitcoin exchange-traded fund and; PayPal, which allows PayPal Cash and Cash Plus users to buy and hold crypto. Coinbase' s debut on the Nasdaq via direct listing in April 2021 can also be viewed as a symbol of mainstream acceptance.

Corporations are also capitalizing on the cryptocurrency frenzy with non-traditional engagements to boost their own brand visibility. On National Burrito Day, Chipotle tapped into the hype by having a day of “burritos or bitcoin” where the brand gave away $100,000 in free burritos and $100,000 in Bitcoin when customers engaged with a new interactive game. Without financial investment, Slim Jim recently engaged with Dogecoin hashtags on Twitter, resulting in exponential growth in new followers – 160% growth in 25 days. The results were so remarkable, they were cited by Conagra Brands Inc.’s CEO, Sean Connoly, on the company’s 3Q21 earnings call.

USAGE + REGULATIONS

There are a number of incentives for companies to engage in cryptocurrency both operationally and transactionally. These include expanding brand reach to a new consumer audience with an interest in the space, improving efficiency and transparency of transactions, and counteracting inflation that cash may endure.

In 2014, Overstock.com became the first major retailer to accept bitcoin for purchases. Now, many companies accept crypto payments – such as Microsoft, AT&T, Starbucks, and select Burger King locations – and convert these payments into cash through exchanges such as bitpay or Bakkt.

These exchanges are required by the US Bank Secrecy Act to assist government agencies in detecting and preventing money laundering. However, regulatory bodies are still currently deciphering which of them should mandate regulations due to both overlapping authorities and jurisdictions as cryptocurrency has not been clearly defined as a currency, commodity, or security. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are actively identifying ways to stabilize crypto markets to continuously increase the security of crypto investments.

Notably, the infrastructure bill recently passed by the US Senate includes a provision on cryptocurrency which requires brokers to report gains on crypto assets. At present the term “broker” is widely defined and has the potential to implicate miners, software developers, and others who do not have customers and therefore would be unable to comply with the provision. Some advocates in the House have made a case for the provision to be amended to prevent it from overreaching and hindering consumer engagement.

As a next step, lawmakers are considering the possibility of a dedicated crypto exchange charter that will define the parameters of DeFi and provide oversight in the creation of stablecoins (cryptocurrency whose market value is pegged to an external reference, often fiat currency). This would limit use of anonymity that potentially obscures the ownership of cryptocurrency from its movement, therefore preventing money laundering and other illicit activities.