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2020 Roundup: The Year in Digital Assets, Finance and Economics

Gunnar Jaerv
Gunnar Jaerv 14 January 2021

2020 was the year when states around the world got serious about digital assets. Some regulated them, some banned them, and some set about creating their own; many created clearer regulatory frameworks.

At the same time, significant institutional money began to flow into a space that was once derided as a fad and was now increasingly seen as a store of value offering better security and returns even more than some traditional safe haven investments.

Simultaneously, the traditional financial world pivoted to a fuller integration with the world of digital assets. Some businesses created digital asset-centric spinoffs, others built their own stablecoins or plugged their offering into the erstwhile ‘crypto’ world in other ways.

This was also the year when a pandemic shuttered businesses, shortened commutes (in many cases to just a few yards) and changed the way millions lived and worked. The effects on the global economy are still in their early stages, but we can expect significant disruption to a consumer economy. In the markets, oil prices went negative, the Dow and other markets nosedived and then recovered, and Coronavirus relief stimulus packages involving huge new government spending triggered inflation fears.

Here’s a look back on the year’s top stories and key trends.

Consumers and businesses both adopted digital assets in a big way.

Significantly, they both moved into digital assets both as a store of value and as a means of payment.

Consumers pay with BTC

For consumers, the first prepaid digital asset Mastercard launched in the US, by global blockchain provider Bitpay. The card lets customers convert digital assets into fiat instantly; the resulting balance is then loaded onto the card without conversion fees. So it doesn’t provide a ubiquitous, consumer-friendly onramp — you need to own digital assets already to use it; but it does permit people to spend their digital asset balance at the store.

Perhaps more significant was Paypal’s announcement that it would let its users make transactions in Bitcoin in 2021, integrating digital assets payment into an already hegemonic payments platform and introducing 28 million potential new users of Bitcoin as a payment medium. It’s a sign that the door is opening to make ordinary purchases with digital assets, as well as cross-asset trades on exchanges; it’s also a huge new onramp to the digital asset world for fiat currency holders (which is to say, everyone).

Businesses build payment systems around tokenization

At the same time, businesses are exploring creating stablecoin-based payment systems for their customers; games, remittance and fintech companies are all eyeing the potential for a compliant, instant transnational payment system that has low enough friction to make high-volume minor payments profitable.

Institutional investors move in

Institutional investors increasingly regard digital assets as a viable store of value too; While the absolute sums are still comparatively small (for a give value of ‘small’; we’re still talking about billion-dollar transnational investment streams here), the rate of growth in digital assets holdings by institutional investors shouldn’t be ignored. In the first week of 2021, Grayscale added $6 billion to their digital assets AUM.

A hedge against inflation

Bitcoin especially is also increasingly popular as a hedge against inflation. Over the last year it’s moved from being commonly regarded as a risky investment, to a new status as a safe haven that offers better security and yield than gold. In particular, digital assets don’t suffer from inflation, so they’re an attractive alternative to fiat currencies in a period where central banks are spending their way out of the coronavirus crisis, one fiscal stimulus at a time.

2020 was also the year regulators across the world started building in earnest, creating structures to manage digital assets purchases and sales.

Is that coin a security?

The 2018 ICO boom left many with a bad impression of tokenization and tarnished the reputation of digital assets more generally. It also called regulators’ attention to the proliferation of digital assets projects.

First to respond was the SEC, which established by announcements and a landmark court case that securities would be defined by function rather than form even when the form was digital. The repercussions rang through 2020 and continue to reverberate; Ripple faced an SEC lawsuit in December of 2020 that saw two of the company’s executives in the dock, charged with $13 billion in unregistered securities sales. Coinbase is also being sued for having profited from the sale of XPR tokens.

Banks can custody crypto — and more

Digital assets companies and associated fintech startups increasingly sought to usurp some of banks’ chief functions, from loans to custody, payments and savings. 2020 was the year when banks began to move toward the digital assets world themselves (obviously, there were early adopters; JP MorganChase stands out).

In July 2020, the OCC (Office of the Comptroller of the Currency) announced that US chartered banks could offer fiduciary and non-fiduciary custody for digital assets, with some fairly stringent restrictions: the announcement applied only to assets backed 1:1 by a fiat currency, with additional reserves, reporting and audit requirements.

Once the door was open, though, the OCC continued to move, widening the remit banks had to manage digital assets; in the first days of 2021 another interpretative letter from the OCC announced that banks would be able to act as blockchain nodes and to use stablecoins for payments.

States went two opposite ways on digital assets in 2020. Some moved to integrate digital assets further into national life — either by offering regulatory clarity for the market that already existed, or by creating their own state-issued CBDC (Central Bank Digital Currency); others moved to ban digital assets altogether.

State digital currencies

Sweden made clear its intention to explore a potential ‘e-Krona’ CBDC; China trialled its digital Yuan throughout 2020, including a large-scale trial in October, all amidst protestations that eCNY is not a CBDC — technically it is the liability of several major Chinese state banks rather than China’s central bank. China has made it clear that the eCNY will not be listed on exchanges, but it is currently accepted at sporting goods store JDSports.

Around the world, 70% of central banks are exploring the idea of CBDCs, and 25% said the current laws of their country allowed for creating a CBDC. The majority intend to use some form of distributed ledger (blockchain) technology.

One of the most exciting developments of 2020 was the growth of DeFi — decentralized finance, offering financial instruments, investment, loans and similar services in a decentralized way and using digital assets.

Decentralized finance

The sector grew rapidly through 2020, reaching 10X its January 2020 value by October and rising rapidly from November onwards to a peak at the time of writing of $22.4 billion. It’s becoming a major driver for perceived value of key digital assets, most notably ETH and BTC — and even when their meteoric rise began to stall (as of January 7 2021), DeFi investments kept rising; perhaps driven by the opportunity to gain yields high not merely by the anaemic standards of recent traditional investments but by any standard — like Zcash’s 105% returns.

We can expect DeFi to grow rapidly in 2021 whatever else happens.

2020 was an interesting year for the traditional markets too.

Economic contraction, balance of power shifts

The Coronavirus pandemic was forecast as far back as June 2020 to pitch the global economy into its worst recession since 1945. Central banks have attempted to stimulate their way out of this fate or mitigate its worst effects, with mixed results. The US economy weakened significantly at the end of 2020, lending teeth to predictions that the country would be eclipsed by China as the world’s leading economy by 2028. But the impact of the Coronavirus on the global economy was thought by September to be less severe than originally feared.

Fuel and flight

The price of oil, a key global economic indicator, plunged to unprecedented depts amid crashing demand occasioned by lockdowns and travel restrictions in response to COVID. In April 2020, oil fell to below zero; though benchmark prices had returned to $50 a barrel by January 2021, partly thanks to Saudia Arabia’s plans to deliberately limit production.

The aviation industry was grounded for much of the year, with everything from holiday flights to business travel curtailed or cancelled. Planes were grounded and several airlines may never fly again, with the US slated to lose a major player.

BTC rising

While most of the sudden rise in BTC and ETH happened in the first week of this year rather than in 2020, we’d be remiss to leave it out of the most important events of the last year. BTC remains price-volatile but peaked recently at over $40,000, a historic high and meteoric rise from $19,000 in early December.

Price rises like this can only happen if a significant amount of money is flowing into BTC, indicating strong uptake from investors of all types. While the price continues to fluctuate, it has yet to fall back below $30,000 and is up around 425% from this time last year. Other digital assets are tracking BTC’s rise.

What this means for the digital asset space and the global economy we can’t know for sure; but digital assets will play an increasingly central part in global finances as the world struggles to recover from the Coronavirus pandemic.

Check out our weekly news roundups to stay abreast of key developments, and a happy New Year to all our readers!

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