Two Worlds Colliding: Digital Assets No Longer on the Horizon

Just over 11 years ago, on May 22, 2010, two pizzas were purchased for 10,000 BTC (approximately $373 million as of May 22, 2021) in what would become known as the first use of bitcoin in a commercial transaction. This milestone was recently celebrated by Sam “Snackman” Weinrott and the Rare Pizzas team by giving away a million free slices of pizza on May 22, 2021.

While this story highlights how far cryptocurrency has come in the past 11 years, cryptocurrency’s flight is just beginning. In Guidehouse’s second edition of the Two Worlds Colliding Series, we delve into the current crypto market environment and the impact of recent happenings on the future of cryptocurrency. 

Specifically, we discuss the following topics:

1. Cryptocurrency Global Regulatory Outlook
2. New Products and Services
3. Trends in Consumer Adoption of Cryptocurrency
4. Recent M&A Activity
5. Environmental, social, and governance highlights 
6. Notable Quotes 

1. Crypto Global Adoption: Who’s In, Who’s Out?  Regulatory Outlook Provides Insight 

Government responses to crypto adoption still vary broadly, ranging from embracing it as legal tender (El Salvador, Japan) to hostile enforcement (China). Below are some of the most recent regulatory headlines across the globe. 
Countries and organizations working to accelerate cryptocurrency adoption: 

• As of May 2021, approximately 80% of central banks are evaluating central bank digital currencies (CBDCs) and 40% have already performed proof-of-concept tests. More than 11 countries have launched CBDC proof-of-concept tests, including Hong Kong, Thailand, China, Australia, Singapore, and Japan.
  
  
• El Salvador officially recognized bitcoin as legal tender on June 9, 2021. The new legislation requires businesses to accept bitcoin for all goods and services. For businesses that do not want to take on the added risk of holding significant quantities of bitcoin, the Salvadoran government is creating the Development Bank of El Salvador that can immediately convert bitcoin to US dollars. 
  
  
• In April 2021, the US House of Representatives passed H.R. 1602, the Eliminate Barriers to Innovation Act of 2021, and sent the legislation to the Senate to review. The bill would create a working group to evaluate the US treatment of digital assets. If passed, this bill would directly impact how digital assets are handled in the US and, hopefully, will lead to further regulatory clarity.
  
  
• On April 6, 2021, the Crypto Council for Innovation, which includes Coinbase, Fidelity Digital Assets, and Square Inc., launched, with a mission to “unlock the transformational promise of crypto.”
  
  
• Individual companies have increased their lobbying efforts. Lobbying disclosure records indicate that, as of early 2021, there were at least 65 lobbying contracts addressing topics such as digital currency, cryptocurrency, or blockchain, which was up from approximately 20 in 2019.  
  
  Countries and organizations working to stymy adoption of cryptocurrency:
• On May 18, 2021, Chinese regulators issued measures reiterating the 2017 ban and expanding the scope of prohibited services. In addition to preventing banks and online payment platforms from offering any crypto-related services, such as account openings, registration, trading, clearing, settlement, and insurance, the measures introduced additional limitations, such as banning exchange services between cryptocurrencies and traditional fiat currencies, as well as prohibiting cryptocurrency saving, trust, or pledging services or issuing crypto-related financial products.
  
  
• Jurisdictions throughout the US are beginning to introduce crypto mining regulations. Missoula, Montana requires all cryptocurrency mining to be offset with renewable energy. On May 7, 2021, the New York State legislature introduced a bill calling for a crypto mining moratorium until the environmental impact of crypto mining can be assessed.

2. Crypto Banking Services Go Mainstream

Financial services firms have made progress toward developing cryptocurrency-based products and services for customers. Examples of these developments include: 

• Using Venmo and PayPal to Pay with Cryptocurrency: Venmo announced that it would introduce a way for users to buy, hold, and sell cryptocurrency directly within the Venmo app. Venmo’s parent company, PayPal, also introduced functionality to enable PayPal users to “Checkout with Crypto,” which instantly converts from cryptocurrency to US dollars to facilitate the transaction.
  
  
• Accessing Cryptocurrencies from Traditional Banks: Crypto custody firm New York Digital Investment Group (NYDIG) has partnered with Fidelity National Information Services to provide a service to US banks that will enable them to offer bitcoin to their customers. Patrick Sells, head of Bank Solutions at NYDIG, has stated that hundreds of banks are enrolled in the program, including smaller community banks such as California-based Suncrest: “What we’re doing is making it simple for everyday Americans and corporations to be able to buy bitcoin through their existing bank relationships.”
  
  
• Cryptocurrency Investment Funds Accessible to the Public: In April, Morgan Stanley and NYDIG worked together to create a bitcoin-only private fund that raised nearly $30 million from more than 300 investors in its first 14 days. Further, JPMorgan Chase is developing an actively managed bitcoin fund that will be available for private wealth clients. This marks a significant shift from the bank’s original approach to cryptocurrency and signals increased adoption across the industry.
  
  
• Providing Underbanked Emerging Markets Consumers Access to Products and Services through Cryptocurrency: Visa is partnering with Tala to provide digital financial services in emerging markets, with the goal of facilitating easier access to cryptocurrencies for underbanked consumers. Through this partnership, consumers will be able to access US dollars in Tala’s digital wallet and Visa will provide cards linked to the wallet that can be used similar to debit cards at any of the 70 million merchants worldwide that accept Visa.
  
  

• Cryptocurrency Custody Services: On April 27, 2021, US Bank announced that it planned to offer a new cryptocurrency custody product in partnership with an unnamed sub-custodian. Further, US Bank also announced that it had been selected to administer NYDIG’s bitcoin exchange traded fund.

3. Trends in Cryptocurrency Consumer Adoption 

The May 2021 Cryptocurrency report by PYMNTS confirmed that crypto is now widely adopted, with regulators encouraging its proliferation with guardrails. The report showed that consumers increasingly own cryptocurrency and are looking for places to use it, incentivizing merchants to provide options for consumers to pay with crypto. 

4. Crypto M&A Market is Heating Up

Cryptocurrency mergers and acquisitions (M&A) has started to pick up the pace. Cryptocurrency firms are looking to expand the breadth of their services and established institutions are looking to gain a foothold in this increasingly important space. 

• Huobi Group’s $100M investment in decentralized finance and M&A: Huobi Group's wholly owned subsidiary, Huobi Ventures, plans to use the funds for supporting blockchain projects, and investing in strategic acquisitions to grow the company’s product offerings.
  
  
• Galaxy Digital acquires BitGo for $1.2B: Galaxy Digital, led by Michael Novogratz, has acquired U.S.-regulated crypto custody specialist BitGo to assist in its mission of institutionalizing digital asset ecosystems and blockchain technology with an intention to become a prime broker.
  
  
• PayPal to acquire Curv for as much as $500M: PayPal has agreed to purchase Curv, a company striving to be the institutional standard for digital asset security.

5. Crypto Won’t Be Burned by ESG—Addressing Climate Concerns:

Even cryptocurrency isn’t immune to environmental, social, and governance (ESG) demands. As cryptocurrencies increase the amount of energy they demand annually, climate concerns have been put front and center. 

• Cryptocurrency’s energy consumption has come into the spotlight recently, with Tesla’s Elon Musk walking back his prior statements regarding Tesla accepting Bitcoin as payment due to environmental concerns.
  
  
• Studies show that bitcoin mining uses 0.63% of the electricity consumed across the globe, which is equivalent to the amount of energy Sweden uses in a year. 
  
  
• Michael Saylor, Elon Musk, and North American Bitcoin mining companies came together to create the Bitcoin Mining Council, which plans to focus on promoting the adoption of sustainable cryptocurrency mining initiatives.

6. Don’t Take Our Word—Recent Quotes from Industry Influencers:

Industry leaders have been active in voicing their opinions. See below for some key quotes showcasing some of the happenings in recent months. 

How Guidehouse Can Help

Our Cryptocurrency and Digital Asset Services team can assist companies with the strategic planning and risk management program design needed to enter this arena. As regulations and policies are created and amended, our Bank Secrecy Act/Anti-Money Laundering team has the expertise to guide your organization through the regulatory and compliance environment and address the mounting complexities as cryptocurrencies are integrated into the finance mainstream. 

Our Business Transformation and M&A experts provide diligence, strategy, integration management office, subject matter expertise, and execution support. We focus on digital enablement, operational improvement, and margin improvement, as well as accelerating the integration of firms through rapid due diligence and agile and practical M&A integration advisory and execution.