Twenty-twenty has definitely been an interesting year and while international news has mostly been doom and gloom, crypto performed exceptionally well. 

From a low point in March 2020, where the Bitcoin price dropped to almost US$3,000 to the end of the year where it reached US$29,022. We also saw leaps and bounds in the development of regulations,  the Financial Action Task Force’s (FATF) recommendations were implemented or developed by many countries and crypto companies. In the US, banks were allowed to custody digital assets and two crypto companies obtained banking charters. 

There was also a steady stream of institutional investment in Bitcoin and other digital assets. Microstrategy invested over $1billion in Bitcoin and PayPal announced support for a number of cryptocurrencies.   

All of this has been very exciting, but what can we expect to see in 2021?

These are our five crypto predictions for 2021:

1.The real institutionalisation of Crypto

If you have been in this space for a while you would have probably grown tired of hearing: “The institutional investors are coming”. This has been said since 2017, however, we face what we like to call the ‘real’ institutionalisation of crypto. It sounds cliche, but this time around it is different for a few reasons. 

Unlike previous bull runs, this time we have a lot of the infrastructure in place that institutional investors require to take an asset class seriously. Good custodians and exchanges exist, who are regulated in some form and have insurance from well known institutions, such as Loyds and Aon. Additionally, a number of listed companies have invested a percentage of their treasury in Bitcoin and well known investors such as Paul Tudor Jones, Stanley Druckermiller and Raoul Pal became proponents of Bitcoin, with Pal being the most aggressive stating that he has put 75% his liquid assets in Bitcoin. 

The macro economical environment is primed for a paradigm shift with the US printing a fifth of all the US dollars in circulation in 2020 alone. This unprecedented money printing has forced many investors to take another look at Bitcoin, with it’s deflationary supply, and questions their previous assumptions about fiat currencies and stocks. Investors like  Mark Yusko called for institutions to #getoffzero and invest at least 1% of their assets in Bitcoin.

The reality is that this isn’t going to be a quick process. Institutional investors have very high requirements and there are only a few assets/companies that meet all their requirements. A good example of this, is the uncertainty around which assets should be classified as securities, with only Ethereum and Bitcoin having clarity from the SEC.  

2.Matured DeFi

DeFi was a hot trend in 2020 with the ‘DeFi summer’ giving rise to an explosion in projects such as Compound (COMP), Uniswap (UNI), Aave (AAVE), Yearn Finance (YFI) and many more. During this period, the average transaction size per wallet was $41,000 pointing to the interest in DeFi not only coming from retail investors, but also much larger investors trading larger amounts. DeFi also promises good returns on fairly ‘safe’ types of investments, providing assets to be borrowed out in a protocol that requires over-collateralisation by any borrower.  Additionionally, innovative products such as Nexus Mutual gives investors the opportunity to decrease the protocol risk by taking out insurance against their position for a specific smart contract. 

In 2021 we expect to see even more interest in DeFi as new protocols are developed and the existing protocols mature. One of the key trends we expect in 2021 is interoperability between different protocols, both on the same blockchain, but also between different chains. Currently, most of the DeFi ecosystems are built on the Ethereum blockchain -the browser wallet extensions are already mature and one wallet can contain all the different DeFi projects assets. This makes it easier to interact with all the DeFi applications.  Projects such as Polkadot facilitate interoperability and will link users from many different ecosystems into one larger DeFi ecosystem. 

This will not only provide massive opportunities for new products in the DeFi space, but also for new security vulnerabilities. Always remember to perform thorough due diligence reviews of any protocol you are investing in and get an expert to review security audits and any other information to identify potential risks.   

3.The rise of NFT’s and securities on the blockchain

The development of standards on top of the Ethereum blockchain such as ERC-721 (Non-Fungible Token) ,ERC-1404 (Simple Restricted Token Standard) and ERC-1155 (Multiple Token Standard) have opened the doors for NFTs and security tokens. 

ERC-721

ERC-721 is a standard that allows creators to create unique Non-Fungible Tokens (NFT’s) which emulate rare, collectible items in the form of Ethereum tokens. The token type is unique and can have different values than another token from the same smart contract, due to its age, rarity or even something else like its visuals. The best example of an NFT ecosystem would be Cryptokitties. These NFT cats were first introduced in 2017 and allowed users to buy, collect and breed unique felines on top of the Ethereum blockchain. Each of these NFTs had their own unique properties which allowed users to start breeding these NFTs to produce unique offspring. The more unique the properties of one of these NFTs were, the more valuable they became. This resulted in the popularity of NFT market places where users could buy and sell their NFTs and in 2018, one of these Crypto Kitties was sold for 600 ETH. 

There are a lot more NFT projects out there which include games like Cryptokitties, Aavegotchi, Axie Infinity and Gods UnChained as well as virtual worlds such as Decentraland and The Sand Box.   

ERC-1155

ERC-1155 goes hand in hand with the ERC-721 standard and allows creators to create more unique items, which can be used with the standard NFTs. The most common use for ERC-1155 tokens are items that can be equipped by the ERC-721 NFTs in games. An example of this is within the Aavegotchi metaverse; Aavegotchi’s are DeFi NFT assets that can equip ERC-1155 tokens (which are called wearables). These wearable items have properties that can make the current NFT even more unique and valuable. 

Below is a quick view of the current NFT ecosystem.

https://www.theblockcrypto.com/genesis/78736/nft-ecosystem-map-research

The whole NFT space is starting to gain traction and the secondary market space that is being built on top has potential to grow significantly during 2021. At the moment there are projects that are looking at building bonds with the NFT technology as well as creating house mortgages and more. 2021 will definitely be an interesting time for NFT’s.

ERC-1404

Security tokens on the blockchain are not a new idea and were all the rage – with certain projects over-promising what they could achieve in the 2017 hype. New standards such as ERC1404 provide a tried and tested way for token issuers to issue fully compliant tokens on Ethereum. 

ERC-1404 provides issuers the opportunity to implement a Know-Your-Token (KYT) standard to ensure they meet their compliance requirements and ensures that tokens are only issued to a whitelist of investor addresses. Issuers can also implement the ability to revoke or reassign tokens, freeze tokens as well as approve or reject transactions.Multiple lists of token holders can also be created, for example to prevent investors in one jurisdiction from trading with investors in another jurisdiction.  

We have already seen SEC filings using this standard by Aptorum Group, Digital Innovative, Theseus Debt Fund, Arca US Treasury and Diginex Limited.   

4.Nation state digital currencies

Some in the crypto industry may not be excited about Central Bank Digital Currencies (CBDC’s), however no one can deny that the development of these currencies will introduce a whole new wave of investors to digital assets. Once people are using a digital currency issued by their government, it isn’t such a far leap for them to start looking at Bitcoin and other decentralised protocols.

Many are also pointing to a currency cold war where nation states as well as corporations will be competing for control of your wallet. We’ve already seen China and Facebook make large leaps of improvement in 2020,however in 2021, the competition will heat up as the US and a number of other competitors enter the ring. It’s too early to make any predictions on who will be victorious in this race, however it’s obvious that Asia already has a large head start. Apps such as WeChat and Alipay, adoption rates of digital payments are expected to be much higher than in jurisdictions such as the US where cheques still make a regular appearance in society (with the US stimuli cheques issued in 2020). 

5.The shake out of regulations

After the last few years many people may  feel like they are suffering from some regulatory fatigue. The FATF brought out their guidance on Virtual Assets in June of 2019, a number of jurisdictions have updated their laws and companies started working towards compliance. One of the extremely contentious points, which is also technically difficult to implement, is the travel rule. We expect 2021 to bring more innovation in this space with organizations such as Inter VASP Massaging Standard and Travel Rule Information Sharing Alliance (TRISA) helping to create international standards for Virtual Asset Service Providers and provide solutions to critical issues. 

As the industry works towards new solutions we expect regulations in the space to develop further. A number of jurisdictions are in the process of regulating entities issuing or using digital assets. With the Hong Kong Securities and Futures Commission (SFC) issuing their first crypto currency trading platform license, we can expect many more nations to follow suit with fully regulated solutions.

This increase in regulations will likely lead to a divide in the industry between fully compliant and non-compliant protocols while regulators also have to wrestle with Decentralized Autonomous Organisations (DAO’s) and what regulations should apply to them, if any. 

Conclusion

2021 is starting to look like the perfect storm for the cryptocurrency industry. Regulations and technical solutions are being developed just as institutional interest picks up. 

We should see a few more exciting developments such as the Office of the Comptroller of Currencies (OCC ) allowing US Banks to operate blockchain nodes and make settlements in stable coins. We look forward to working with our clients to solve some interesting new problems.