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The Future of Money

The development of new financial technologies and their adoption by nation states and private actors is unleashing transformative effects on the international financial system. Though the dollar remains the dominant international currency today, there is contentious debate over whether it can be, or is in the process of being, replaced.

While another fiat currency replacing the dollar in the short term remains unlikely, the development of digital currencies in the form of central bank digital currencies (CBDCs), de-centralized cryptocurrencies, and private-sector digital currencies all pose threats to the U.S.’s ability to continue capturing gains from current systems, leveraging dollar centrality to enforce sanctions, and otherwise influence international financial transactions over the longer term.

Our 3-part series, The Future of Money, breaks down the technologies and geopolitical forces shaping the global financial landscape and is a critical resource for those looking to better understand and navigate its rapid transformation.

Power Maps are just one of the tools from FP Insider that help you cut through the noise of a compex world. FP Insiders gain access to critical global intelligence from a trusted and reliable source. Learn more about FP Insider.

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Future of Money
Part 1

Emerging Challenges to U.S. Dollar Supremacy

Driven by perceived U.S. sanctions overreach, numerous countries now seek to circumvent the dollar-dominated financial system. Emerging technologies are paving the way.

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Future of Money
Part 2

Cryptocurrencies: Vehicles of Financial Change

The widespread adoption of cryptocurrencies could undermine governments' control over monetary policies and disrupt global finance.

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Future of Money
Part 3

Institutional Adoption of Disruptive Financial Technologies

A comprehensive picture of the forces and actors that are critical to understanding and navigating the future financial system.

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CRYPTOCURRENCY DATABASE

A catalogue and country-level breakdown of cryptocurrency regulation across 117 countries.

EXPLORE THE DATABASE
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Section 1

The Fundamentals of Cryptocurrency

When cryptocurrency was first introduced, it was largely viewed as a niche market for computer scientists and cryptographers. To major economies such as China, the European Union, and the United States, it was not perceived to be a threat to the global financial order. But in recent years, the market has increased to a $1.92 trillion capitalization and has become a meaningful asset class in the financial system that shows little signs of slowing. Indeed, the cryptocurrency ecosystem is in the nascent stages of development, and despite strong recent growth, it represents a fraction of the global markets for stocks, bonds, and gold. As of September 27, 2021, the market capitalizations for the S&P 500, the global bond market, and gold were $38.2 trillion, $123.5 trillion, and $11.14 trillion, respectively, suggesting that the market has plenty of potential for further growth.

With 11,893 types of coins currently in circulation and 409 exchanges, all of which provide various functions, not all cryptocurrencies attempt to replace or replicate fiat currencies. Executive Director Kristin Smith of the Blockchain Association stated that while there are generally four different categories of cryptocurrency—decentralized finance (DeFi), stablecoins, internet infrastructure, and non-fungible tokens (NFTs)—the goal of cryptocurrency is to incentivize and support the development of decentralized networks that make online interactions and transactions more efficient, transparent, and non-reliant on a third party.

Section 1
Key Takeaways

  1. Not all cryptocurrencies are created equal.

    Depending on a cryptocurrency’s purpose, the type of blockchain technology and algorithm used varies. In general, native cryptocurrencies such as Bitcoin and Ethereum operate on a public blockchain that is accessible to everyone, whereas privately developed cryptocurrencies and CBDCs are managed by an entity or group of entities. Not all cryptocurrencies, however, try to act as money, and some instead serve numerous functions, from internet infrastructure to representing a share of a company (usually in the form of security tokens).

  2. Price Volatility A Key Barrier for Widespread Adoption.

    A variety of factors influence a coin’s price, including the supply of coins, investment by other companies and organizations, and the coin’s perceived usability, which is often characterized by institutions’ ability to accept it as a form of payment. To date, due to dramatic price fluctuations, cryptocurrency has primarily functioned as a digital, scarce vehicle for speculative investment and not as a medium of exchange.

  3. China’s crypto mining dominance ebbs amid regulations and supply chain constraints.

    China has long held much of the global Bitcoin mining share, but from September 2019 to April 2021, its share plummeted from 75.5 percent to 46 percent following its restrictions on mining and trading. Many miners are turning to North America and Central Asia as alternatives. Chinese companies that dominate the mining equipment sector have also faced several supply chain constraints as the world suffers from semiconductor shortages, and businesses continue to manage the disruptions from the COVID-19 pandemic.

Expert Q&A

Headshot of Kristin Smith

Kristin Smith

Executive Director, Blockchain Association

Q: What is the end goal for cryptocurrency?

“The purpose of cryptocurrency is to incentivize and support the development of decentralized crypto networks. These networks have many different functions, which generally fall into four different buckets.”

Listen to an excerpt from the interview

First, you have cryptocurrency networks to improve financial services. This is the DeFi [Decentralized Finance] space that we hear so much about these days.

You have another subset of cryptocurrencies, stablecoins, that seek to improve the way we make and process payments. You could argue that's a subset of DeFi, but I think of them as something distinct.

There's another set, known as Web 3.0, that deals with building a better internet infrastructure. This involves building protocols that replace some of the large platforms we see today.

And then there's a fourth category, which are NFTs and other non-fungible digital assets, whether it be art or some other specific application where you have a token that represents a[n] asset.

These networks all share the common goal of making online interactions and transactions much more efficient, much more transparent, and ultimately not relying on a centralized party to offer that service. The exchange of Bitcoin among individuals is a simple example, but crypto and blockchain networks will also move much of our real world online, removing the intermediary but still allowing you to get the service you need or want.

Broadly speaking, cryptocurrency is a type of digital asset that is encrypted and decentralized. Most cryptocurrencies (but not all) operate on a blockchain, which is a type of digital ledger technology (DLT). Simply put, a blockchain digital ledger is a record of transactions that is duplicated and distributed across an entire network of computer systems. The database is filled with entries that must be confirmed, and the network has coins and tokens that possess no intrinsic value. Not all coins and tokens are created equal, and they have varying degrees of utility as media of exchange, stores of value, or units of account. In fact, some are referred to as “shitcoins,” which are cryptocurrency with little to no value and no immediate or discernable purpose. Dogecoin, for example, was created in 2013 as a joke among engineers and was a play on a “doge” meme that features a Kabosu, a Japanese Shiba Inu, and was intended to mock other serious coins. At the time, it was valued at $0.0002979. Today, with no paid staff and no white paper to outline its purpose and utility, as seen with most other serious coins, the altcoin is one of the best-performing digital assets in cryptocurrency and has seen a recorded 14,000 percent growth in 2021. Its market capitalization as of September 27, 2021, is $26.1 billion.

Dogecoin’s evolution from a joke to a multi-billion-dollar asset class that sent the Jamaican bobsled team to the 2014 Olympics and financed about $50,000 for clear water in Kenya underscores a larger shift taking place where individuals and technology are usurping traditional financial structures and creating economic opportunities simply because there is a belief that something is different about the underlying value of the asset. It is the motivating force behind the cryptocurrency market and other disruptive forces challenging the traditional financial landscape as illustrated by the 1,700 percent rise of GameStop’s stock from December 2020 to January 2021 to a total market value of over $10 billion. The chart below outlines some of the many differences among these types of digital currencies and how they have been applied to this Power Map series.

Central Bank Digital
Currencies (CBDCs)
Cryptocurrencies Stablecoins*
Overview Issued by a central bank and created to transfer different types of currency digitally. Decentralized digital asset that remove the necessity for a third party for financial activities. Types of cryptocurrencies, specifically tokens, that attempt to solve crypto’s biggest problem—value fluctuation—by backing it with price stable assets.
Blockchain
technology type
Permissioned (or private) blockchains, meaning that they are controlled by a single entity or a group of entities.

May or may not use blockchain technology. Depends on the developer.
Permissionless (or public) blockchain, meaning that it is open to everyone.

May or may not use blockchain technology. Depends on the developer, however, popular coins by market capitalization use blockchain.
Since they are tokens, they are typically minted on a blockchain.

The most popular stablecoins by market cap—Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI)—are all Ethereum-based ERC-20 tokens. This makes them suitable for applications with DeFi solutions.
Traceability Can track people’s identities. Not pseudonymous. One key characteristic of pseudonymous cryptocurrencies is that it uses cryptography to mask personal identifiable information.

Some cryptocurrencies have more privacy and anonymity built in, such as Zcash and Monero, which can make individual accounts harder to trace. These types of coins are known as “privacy coins.”
Stablecoins usually offer pseudonymity, however, it varies among coins.
Use cases Use cases mainly for payment and other monetary transactions. Use cases mainly for speculative purposes and payments. Digital payments and monetary transactions, especially remittances. Also used as a store of value for long-term hedging.
Value Value is determined by a combination of FOREX trading, central bank monetary policy, and the country’s economic output for that specific fiat currency. For instance, China’s digital yuan’s value is determined exclusively by the value of the yuan against the U.S. dollar with those variables that influence its value. Perceived store of value causes cryptocurrency values to fluctuate dramatically. In other words, who is buying or selling the cryptocurrency will change the price. Backed by different types of collateral: fiat (e.g., USD, euro), cryptocurrency (e.g., Bitcoin, Ethereum), or commodities (e.g., gold, oil, real estate).

Some stablecoins can be pegged to other assets. For example, a stablecoin can be backed by a basket of securities that include stocks and bonds.

*For the purposes of this Power Map, stablecoins are treated separately from cryptocurrencies, because regulatory approaches vary between cryptocurrencies and stablecoins, given that the most popular stablecoins are backed by fiat currencies. Moreover, private-sector companies that are seeking to launch their own digital currencies are largely considering stablecoins rather than native cryptocurrencies. Stablecoins and private-sector-developed coins will be discussed further in Part III.

Sources: 101 Blockchains, Business Insider, International Monetary Fund, Shrimpy Academy, and the U.S. Department of Treasury Office of Foreign Assets Control

Proponents view cryptocurrency as a technological solution to problems within the existing financial system as well as a boon to transparency and direct control over personal finances. Compared to fiat currencies, cryptocurrency transactions are theoretically designed to provide cheaper banking, occasional deposit, and minimal to no withdrawal fees, because there are no third parties. International payments in cryptocurrency also have relatively low transaction fees, which vary depending on the data size of the transaction and the network condition at the time of the request, but generally are cheaper than international fiat currency payments. For example, the global average for remittance fees per transaction is 6.38 percent as of Q1 of FY2021, according to the World Bank. In comparison, depending on the cryptocurrency network, average fees per transaction can range from zero to 3.93 percent. However, depending on the type of consensus protocols, activity on the network, and number of miners, among other variables, crypto transaction fees can reach as much as 17 percent.

With lower costs, cryptocurrencies are suited for cross-border transactions, especially remittance payments. Lower fees are particularly important for small and medium-sized enterprises, which typically have lower transaction volumes and pay higher fees than larger organizations that trade at scale. For communities that do not have access to financial services, cryptocurrency enthusiasts assert that blockchain technology is a means for financial inclusion. The World Bank estimates that 1.7 billion individuals remained unbanked as of 2017—an issue that is exacerbated by the limited reach of physical banking infrastructure around the world. Some companies focus exclusively on financial inclusion and distribute their own bespoke cryptocurrency to local economies, even providing cellphones to onboard individuals into the cryptocurrency ecosystem.

To understand what is driving cryptocurrency adoption and the challenges it poses to regulators, the following graphics walk through how cryptocurrencies operate, how they derive their value, and what their limitations are. The graphics specifically showcase the underlying DLT technology, such as blockchain, the key defining characteristics of cryptocurrency mining, and the drivers of dramatic price fluctuations in cryptocurrencies.


The Fundamentals of Blockchain Technology

Underpinning most cryptocurrencies is blockchain technology, which employs cryptographic methods—the mathematical and computational practice of encoding and exporting data—to maintain security of the digital asset. Broadly speaking, a distributed blockchain network (also known as a “public blockchain”) is a network of computers linked to each other, instead of a central server, that together create a digital ledger of transactions that is duplicated and distributed across the entire network, otherwise known as a “peer-to-peer system.”

At the highest level, the purpose of public blockchains is to provide a place to put information that anyone can add to, that no one can change, and that is not controlled by a single person or entity (however, there are exceptions, such as private blockchains and consortium blockchains). Cryptocurrencies such as Bitcoin, Ethereum, and XRP run on their own separate blockchains, and some create tokens that operate within a specific network. Since there is no centralized authority, transactions are verified by users (referred to as “nodes”). Transactions also do not go through right away. They are often processed in batches and added to the blockchain according to its protocol, meaning that the timing of transactions varies by blockchain, how many transactions are being processed, and other factors. The process of verifying transactions and adding to the blockchain is called “mining.” To prevent tampering, blockchains use a cryptographic technique called “hashing,” which functions as a unique tag to prevent someone from changing data in a block or swapping out blocks. The graphic below walks through how public blockchain technology functions and its key components.

Blockchain technology is a type of distributed ledger technology that functions as a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a network.

Note: Depending on the network, some cryptocurrencies may use different consensus mechanisms which are essential to establish agreement about the information in the system among all the different stakeholders. The most common consensus protocol is PoW, but because of its high energy consumption, alternative consensus algorithms have been developed to improve efficiencies.

One example is proof of stake (PoS), where instead of solving puzzles, users put up cryptocurrency as collateral to get a chance to be the next to mine and validate a block. Compared to PoW, PoS uses less energy, because mining a block does not require making guesses to solve a mathematical puzzle. Those with stakes are randomly chosen to create a block and do not need specialized hardware. Some researchers believe that the energy consumption for PoS is 99.95 percent lower than for PoW. Others are skeptical about PoS’s efficacy, given that it accounts only for a part of the overall energy consumption needed to mine a block. Ethereum started transitioning from PoW to PoS in 2020, however, the upgrade is still in the very early stages.

Beyond cryptocurrency, blockchain has the potential to create new technological structures for economic and social systems. Prime areas for such innovation include shipping and supply management, proxy voting and elections management, healthcare, and government services. For example, the U.S. Department of Homeland Security (DHS) is researching the possibility of using blockchain to process international travelers, secure data collected by cameras and other devices at U.S. ports of entry, and facilitate trade across borders. In 2021, the leading use case for blockchain technology within the banking industry was cross-border payments and settlements. Governments and international organizations have integrated cryptocurrency and blockchain technology into their operations, as illustrated by the UNICEF Cryptocurrency Fund that was announced in 2019, which accepts donations in bitcoin and ether and invests those funds directly into blockchain start-ups. Given its current applications and promise, investment in blockchain technology in the first half of 2021 totaled $8.7 million, more than twice 2020’s figure ($4.3 million). By 2024, total global investment is anticipated to be nearly $19 billion, with a CAGR of 48 percent. Some reports indicate that global GDP may rise by up to $2 trillion by 2030 just by utilizing blockchain technology.

There are numerous challenges with blockchain in finance at present, namely its limited scalability and processing speeds. Currently, Visa completes approximately 1,700 transactions per second on average, while Bitcoin processes 4.6 transactions per second. Cryptocurrency blockchains, as they stand today, cannot handle large quantities of transaction requests, because they lead to congestion on the platform. The average transaction time for cryptocurrencies is determined by the time it takes to solve the mathematical puzzle that allows a block to be added to the chain. As a result, some cryptocurrency networks are unable to handle many transactions at once, making it inconducive to small retail purchases. For those who view cryptocurrency as a store of value, slow transaction times are not seen as a problem, but others argue that for cryptocurrency to be used as a legitimate means of transaction at scale, they must be addressed. While there are lesser-known blockchains that are specifically designed to have faster transaction speeds, the central challenge for other networks, particularly Bitcoin, is that changes in the network’s rules can impact the current chain, and thus altering the protocol of a network with many users can be very difficult all the while the networks’ growth under those inefficient rules continues unabated. Some have called this phenomenon “protocol ossification,” or the progressive reduction of the network’s ability to adjust its protocol designs to newer and faster innovations.

The increased uptake of cryptocurrency throughout 2020 and 2021 has caused transaction numbers and block sizes to grow, resulting in transaction fees that are higher than those of some traditional payment methods. In April 2021, for example, due to miner outages in China, Bitcoin’s average transaction fees surpassed all-time highs, which slowed block production when demand was high. As a result, fees reached $62.78, almost 25 times higher than the rate as of September 13, 2021 ($2.55). It is common for Bitcoin transaction fees to fluctuate as much as 10 percent within the same day, depending on the transaction size, number of transactions, and computational power of the network (which can be influenced by the number of miners). Thus, given slow processing speeds, merchants and consumers may be reluctant to accept Bitcoin as a payment method as it would add significant volatility to their businesses.

Several ideas have been put forward to address blockchain’s scalability problem. Some developers have suggested creating a faster internet or increasing the block size so that each block mined would hold more data. Others have created alternative solutions, such as the Lightning Network (LN). Put simply, LN is a second layer on the blockchain that enables users to create payment channels between two parties on that extra layer. Transactions on the LN are faster because of the use of smart contracts, cheaper because the transactions do not take place on the first blockchain layer (also known as “off-chain transactions”), private, and final. The LN, like the rest of the cryptocurrency ecosystem, is still in its early days of adoption and faces numerous technical hurdles, namely that it is limited to Bitcoin-core-based blockchains, such as Bitcoin Cash, Litecoin, and Dogecoin, and therefore is not a solution to the entire ecosystem. In addition, there are cybersecurity concerns regarding encryption keys and hacks from bad actors that are hindering its full implementation.

Source: Reuters

Blockchain Technology Varies Between Coins

While the fundamental concepts of blockchain technology largely remains the same, depending on a coin, there may be differences in its underlying technology, algorithms, and functions. For instance, Bitcoin uses the PoW consensus mechanism while Ripple use the XRP Ledger Consensus Protocol. While PoW blockchains produce blocks, XRPL produces “ledgers” which are faster to confirm than a block. Overall, depending on the coin’s design purpose, the type of algorithm and technology used will affect the average transaction time, transaction fees, and energy for transactions. The chart below shows an at-a-glance difference between Bitcoin, XRP, and Ethereum.

Bitcoin logo Bitcoin XRP logo XRP Ethereum logo Ethereum
Year Launched 2008 2012 2015
Creator Satoshi Nakamoto Ripple Company Vitalik Buterin
Primary Goal Alternative store of value and payment system. Facilitates cross-border transactions, settlements, and remittances in fiat currencies and cryptocurrencies. Provides liquidity for banks and functions as an alternative payment network. Alternative store of value, payment system, and a highway for decentralized finance (DeFi). Enables smart contracts and decentralized applications (dApps).
Notable Whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System The Future of CBDCs Ethereum Whitepaper
Blockchain Technology Public Public Public
Algorithm Proof of Work Ripple Protocol Consensus Algorithm Proof of Work
Mining Yes No Yes
Mining Hardware ASICs N/A GPUs
Mining Intensity Processor N/A Memory
Energy Consumption for one Transaction 951.58 kWh 0.0079 kWh 42.86 kWh
Maximum Supply 21 billion 100 billion 18 million per year
Number of Transactions per Second 3–7 1,500 15–25
Average Transaction Time 60 minutes 4 seconds 6 minutes
Average Cost per Transaction $177.15 USD $0.0000138 $5.13 USD

Note: The following graphic was adapted from a chart by FXEmpire to include updated stats on number of transactions per second, average transaction time, and to include the year launched, goal of the coin, the creator, and the corresponding whitepapers.

Sources: Forbes, FX Empire, Tezro, XRPL Carbon Calculator, and Ycharts.


The Fundamentals of Cryptocurrency Mining

Unlike traditional financial systems, technology drives the supply and demand of cryptocurrency as well as its price. Since blockchain replaces the third party, its computational power is used to establish trust in the value of the digital asset and the transaction history, with the added benefit of transparency. Miners play an essential role in the cryptocurrency ecosystem. Cryptocurrency mining is the process by which new cryptocurrencies are created and enter circulation. It is foundational to the development and operation of the blockchain ledger. Miners use sophisticated computers to solve complex computational math problems to verify cryptocurrency transactions, which are then added to the blockchain. In exchange for their work, miners receive a financial reward, usually in the form of tokens. The profitability of mining is determined by electricity, pool fees (or fees for a group of miners), and the cryptocurrency value at the time of mining.

How Cryptocurrency Mining Functions

The most significant factor for cryptocurrency mining is electricity costs. Currently, Chinese-based crypto mining equipment companies control an estimated 98 percent of the bitcoin mining equipment market.

Electricity +

Electricity costs are considered the most significant factor in long-term mining costs.

Electricity is used to power a miner’s or cryptocurrency farm’s internet connection, mining rig, and air conditioning (AC) or cooling fans, which it needs to keep hardware from overheating. In 2021, approximately 9,000 game consoles and computers were seized at an illegal Ukrainian mining farm that was stealing as much as $259,300 in electricity each month, which authorities warned could have led to power surges and blackouts. Ukraine notably became a hub for cryptocurrency, with approximately 100 companies in the cryptocurrency sector. From 2019 to 2020, $8.2 billion worth of cryptocurrency went out of Ukraine, and $8 billion flowed into the country.

Cryptocurrency mining rig +

A mining rig is a customized personal computer (PC).

A rig possess the basic components of a PC but has specific graphic cards that provide more powerful computational power to allow for mining.

Hardware

  • Application-specific integrated circuits (ASICs) are mainly used for Bitcoin and Bitcoin Cash. They offer high performance and low power consumption, compared to an off-the-shelf circuit, but their internal design is very complex, making them both time-consuming and expensive to create.
  • Graphics processing units (GPUs) are for cryptocurrencies without a dedicated hardware such as BitcoinGold, Ethereum, or Zcash.
  • Companies such as Nvidia are creating cryptocurrency mining processors that are more efficient for hashing to save GPUs for the gaming industry and to avoid chips from being sold in the second-hand market. In the first quarter of FY2021, Nvidia earned $155 million from cryptocurrency mining cards. However, semiconductor shortages are adversely impacting the cryptocurrency mining hardware-distribution chain, resulting in substantial price premiums for mining rigs and, in some cases, the shutdown of smaller mining operations.

Software

  • Miners need software to connect their computers and machines to the blockchain to become a mining node or a miner, or to join a mining pool. The software delivers the miner’s work to the blockchain network and facilitates payment to the miner. It also shows the miner’s statistics, such as hash rate, temperature, and speed.
  • Examples of software include CGminer (used for Bitcoin), Ethminer (used for Ethereum), and XMR Stak (used for Monero and Aeon).
Block reward +

Miners are given a block reward for their mining efforts to the blockchain.

Miners are rewarded with 6.25 bitcoins, which will reduce to 3.125 bitcoins in 2024 after the next halving takes place. Halving is the process where the block reward is cut in half after every 210,000 blocks are mined (or roughly every four years). This is the network’s way of cutting inflation by half, lowering the available supply, which in turn incites higher demand and prices. In 2009, the reward for each block mined was 50 bitcoins and currently stands at 6.25. In the past, halving has correlated with surges in prices, with the last halving resulting in a 533 percent increase as demand for bitcoin surged, but supply issuance remained inelastic.

As cryptocurrency has garnered further attention and demand by consumers and investors, there has been a subsequent rise in the popularity of mining pools, growth in the number of product launches, and heightened demand for cryptocurrency-specific hardware. In 2020, Bitcoin’s hash rate grew nearly 30 percent, which drove accelerated investment into the mining finance sector by key players such as Arctos, BlockFi, Blockfills, Digital Currency Group (DCG), Galaxy Digital, and SBI (most of which are based in the United States). Likewise, mining equipment production companies are delivering more equipment to market. Due to heightened demand, investments in mining have also grown, with analysts estimating that the global cryptocurrency hardware market will grow by $2.8 billion, at a CAGR of 16.1 percent, by 2024. However, supply chain disruptions from the pandemic and semiconductor shortages have hindered the mining equipment industry’s ability to fully meet the growing demand.

Until recently, China dominated the global mining sector, accounting for 67.4 percent of the global hash rate in October 2020 due to cheap electricity prices, which allow for large, cost-efficient mining operations and their dominance in the crypto mining equipment market. However, citing environmental concerns, the Chinese Communist Party’s (CCP) crackdown on crypto mining and trading in 2021 resulted in half of the world’s miners dropping offline. Researchers note that mining itself was not a problem to the CCP, because it was generating wealth without being a transfer of wealth from the renminbi to a digital currency. Instead, the government’s perception of mining shifted from a revenue stream to a “social ill” due to the confluence of heightened criticism regarding mining, namely reports of forced labor in Xinjiang, carbon emissions related to subsidized energy grids in northern and western China, and locally reported brownouts that led to negative externalities. As a result, the long-term impact may be that the crypto industry adopts new protocols to address the environmental impacts of mining.

Following China’s restrictions, the industry has adapted, and miners are now heading to Central Asia and North America, particularly Kazakhstan and the United States, to conduct their operations. As a share of all global mining, U.S.-based mining grew by 151 percent from September 2020 to April 2021 as a result. More recently, Southeast Asian countries such as Laos have also authorized mining following China’s crackdown, authorizing countries to trade and mine Bitcoin as of September 2021. The graphic below showcases the average monthly hash rate—the computational power per second when mining—by share by country and region.

Graphic 3

Bitcoin Hash Rate Share by Country

The following graphic shows the approximate geographic distribution of global Bitcoin hash rate, or the speed of mining in each country from September 2019–April 2021.

Note: Average monthly hash rate share by country and region are based on geolocational mining pool data. Data does not account for the mass migration of Chinese bitcoin miners after April 2021.

Source: University of Cambridge Centre for Alternative Finance

Despite China’s restrictions on mining activity, Chinese-based crypto mining equipment companies dominate the hardware market, with Bitmain, Ebang, Canaan, and MicroBT controlling an estimated 95 percent of the Bitcoin mining equipment market. Measured by hash rate, Bitmain and MicroBT deliver most of the new capacity to the network, with Bitmain’s market share ranging from approximately 66 to 70 percent in 2019. In 2017, a backdoor in Bitmain’s mining hardware called “Antbleed” was discovered that could allow the company to remotely shut down 70 percent of Bitcoin miners’ machines. According to reports, data from the machines could be used to “cross-check against customer sales and delivery records, making it personally identifiable.” Although the company stated that there was no malicious intent, it raised alarms in the crypto industry given that a company with a majority of the market share could potentially cripple the ecosystem by targeting the mining sector.


Cryptocurrency’s Price Volatility

In addition to the underlying blockchain technology, one of the defining characteristics of cryptocurrency is its price volatility. The market is influenced by its perceived store of value, which causes cryptocurrency values to fluctuate dramatically. This perception is informed by a variety of factors, including the supply of coins, where scarcity can drive the price of coins; investment by other companies and organizations; and a coin’s perceived usability, which is often characterized by institutions’ ability to accept the coin as a form of payment, thereby increasing the coin’s utility and making it a preferred medium of exchange for consumers. To date, cryptocurrency has primarily functioned as a digital, scarce vehicle for speculative investment.

The last cryptocurrency bubble occurred in 2017 when the ecosystem was dominated by individual retail investors, many of whom were attracted to Bitcoin’s scarcity (only 21 million bitcoins can exist) and the fact that it operated outside of the global financial system. But with this heightened interest, cryptocurrency gained massive clout, and initial coin offerings (ICOs) and exchanges exploded. By the end of 2017, the ICO market raised an estimated $4.9 billion. Some observers contend that Bitcoin’s price spike in 2017 was due to market manipulation by influential investors that hold relatively large amounts of cryptocurrency holdings (also known as “whales”), while others argue that the spike was driven by individual investors who were buying in “fear of missing out” (FOMO) on the potential benefits of this new technological innovation. Regardless, the cryptocurrency market rose more than 1,200 percent in 2017, and its total market value was just above $760 billion.

But the market lost momentum and crashed by 2018, losing an estimated $400 billion in value. Some economists have argued that even though investors did not know how cryptocurrency worked (and still do not know), 2017 was a classic financial bubble where new transformational technology incited interest and investors bought into the market because of FOMO. Combined with the market’s price volatility, a crash was inevitable. In addition to these underlying market conditions, there were growing concerns of regulatory crackdowns across Asia. In January 2018, Japanese exchange Coincheck, which was the leading cryptocurrency exchange in Asia at the time, suffered the largest hack in digital currency history, in which hackers stole an estimated $530 million. The exchange used cash from its own funds to pay out $426 million toward covering users’ losses but was unable to cover the total value of the crypto that was stolen. In June 2018, South Korean exchange Coinrail then lost more than $40 million to hackers. These events and the subsequent price drops that followed renewed concerns regarding the security of crypto assets and the immense price volatility of the market, driving, in part, increased scrutiny from regulators that sought to balance cryptocurrency’s benefits while mitigating the risks it poses to their economies. However, consumers became concerned that governments of major cryptocurrency hubs in Asia, particularly Japan and South Korea, would impose regulations, thus leading to major selloffs of assets and causing prices to plummet.

Alongside regulators, institutions, macroeconomic trends, and even prominent individuals can also influence prices. In February 2021, Tesla announced that it bought $1.5 billion worth of bitcoin and planned to accept it as payment, resulting in a 20 percent price increase for the coin. Then, in May 2021, Tesla’s CEO Elon Musk tweeted that the company will not accept bitcoin due to environmental concerns, causing the coin’s price to plummet 15 percent. (There are reports as of September 2021 that Tesla will accept Bitcoin payments again if the cryptocurrency is mined using renewable energy.) More recently, following concerns that the Delta variant of COVID-19 could potentially hamper global economic recovery, several coins plummeted, wiping $100 billion from the market. Bitcoin nearly lost all its gains in 2021 following this price drop. Due to the number of variables that can influence prices, some experts have stated that the cryptocurrencies’ stability is extremely difficult to maintain, making it one of the key barriers to widespread adoption as a medium of exchange. The graphic below showcases the volatility of cryptocurrencies over time.

Graphic 4

Average Monthly Prices of Cryptocurrency (2017–2021)

The instability and unpredictability in cryptocurrency prices are key barriers to cryptocurrency being widely used. Stablecoins attempt to resolve this problem by having the digital currency pegged to price-stable assets, such as fiat currencies.

Explore Prices

Note: All values are in USD and are not seasonally adjusted.

Sources: Coinbase, retrieved from the Federal Reserve Bank of St. Louis

Due to the volatility of the market, users have adopted a passive investment strategy called “Hold On for Dear Life,” or HODL (“hold” spelled incorrectly), in which people buy and hold onto cryptocurrency instead of trading it, in hopes that it will increase in value. In the cryptocurrency world, those who have a high tolerance for the high volatility of the asset they own, despite collapsing value, risks, or losses, often describe themselves and others as having “diamond hands” . Conversely, those who sell when prices dip or drop are described as “paper hands” . Indeed, some enthusiasts have developed their own communities around certain coins, which have given rise to an increasingly popular form of “meme investing,” or investing based on social media and online attention.


We Want to Hear from You

How are cryptocurrencies challenging the current financial system? Do you think that they are here to stay?

Section 2

Institutional Interest Drives the Cryptocurrency Ecosystem’s Growth

The demand—and by extension, the price—for cryptocurrencies has ebbed and flowed over time and spiked during the pandemic. The recent boom in 2020 was driven by institutional investors, reputable venture capital funds, tech companies, and governments that are beginning to make sustained commitments to the cryptocurrency ecosystem, particularly the underlying distributed ledger technology. These actions suggest that the market is becoming more professionalized, with deeper liquidity and improved infrastructure to support large volumes of capital movement. Some commenters have noted that the 2020 boom occurred without broader public participation, indicating healthier fundamentals underlying the price spike as compared to the 2017 boom, which was driven by individual investors and developers. With more players entering the cryptocurrency game and becoming increasingly familiar with blockchain technology, increased capital investment flows are fueling the industry’s momentum and further development. Companies such as Square and PayPal are integrating cryptocurrencies into their services, financial firms Morgan Stanley and Goldman Sachs are including cryptocurrencies in their investment portfolios, and retail giants Amazon and Walmart are expressing interest in the digital assets.

When asked why institutions are now showing interest in the industry, experts note that it is partially because there is an increased understanding from traditional brick-and-mortar finance institutions that they need to be responsive to market movements and a more tech-savvy base. In addition, due to the uncertainty posed by the pandemic and heightened concerns of inflation, investors and institutions are using cryptocurrency to diversify their portfolios as an inflation hedge given that native cryptocurrencies such as Bitcoin have a limited supply, which is not influenced by its price. (For investors, banks, and other financial institutions, such investments are sometimes seen as means to diversify investment portfolios, because the gains and losses of cryptocurrency have a relatively low correlation with the stock market.) The risk of inflation also creates the need for “alternative safe haven” assets that allow anyone to have direct custody, unlike other assets such as gold. There is also the added benefit that asset prices overall, including cryptocurrencies, are growing. Some firms anticipate overall earnings growth of more than 30 percent in 2021. Thus, cryptocurrencies are perceived to be a new lucrative asset class for investment, albeit a risky one. Most saliently, however, the move to decentralized finance and cryptocurrencies is an attempt by actors within the financial system and innovators to address a “fundamentally broken” financial system that people see the need to transform.

Analysts from Boston Consulting Group (BCG) predict that governments and organizations will use several forms of digital currency over time to improve their international operations, support domestic and cross-border transactions, and generate new funding opportunities. Although questions remain regarding which digital currencies will shape the global financial landscape, cryptocurrency and the ecosystem that supports it will likely be key drivers of financial change to determine the future of money.

Section 2
Key Takeaways

  1. Key financial institutions are professionalizing the industry.

    Unlike the 2017 boom, which was led primarily by individual investors, financial institutions, retailors, and other private companies are currently entering the cryptocurrency game. Their investment flows are helping to professionalize the industry, indicating that healthier fundamentals are underpinning this most recent boom.

  2. Traditional financial systems must adapt to a new digital age.

    Cryptocurrency is introducing new technology that can provide an alternative way to design a financial system. Today, the industry has gained critical mass as a multi-trillion-dollar asset class, and now players must diversify into a new digital paradigm to meet consumer demand and capitalize on a new revenue stream, particularly as a hedge against inflation.

Expert Q&A

Headshot of Jürg Müller

Jürg Müller

Senior Fellow, Head of Research “Infrastructure and Markets,” Avenir Suisse

Q: Does the current financial system need to be improved?

“[At first,] this digitization was a tool to move the old way of doing finance into the system of these balance sheets so you could circumvent, in a way, these regulations and create elasticity, liquidity, and money within the whole system.”

Listen to an excerpt from the interview

That’s the whole shadow banking system discussion. And then on the other hand, digitization also opened new way of doing finance like decentralized finance [and] cryptocurrencies. And now… It’s a watershed moment. We have the old system working on steroids, on these information technologies where it’s no longer properly working. And on the other side, we have this new system developing. And now is the time, probably, where it’s decided which route we take and which route we go. And I would say that the old way of organizing a financial system, this old financial architecture with centralized balance sheets, with regulation—that is no longer working.


Headshot of Caitlin Barnett

Caitlin Barnett

Director of Regulation and Compliance, Chainalysis

Q: What is driving institutional investment into cryptocurrency, and what are some of the key challenges financial institutions face when managing or investing in cryptocurrency?

“The number-one motivating factor is demand from their customers. Adoption of cryptocurrency rises every year, and crypto was one of the best-performing assets during the pandemic. Crypto is particularly popular among millennials. Financial institutions understand that if they don’t provide access to crypto, their customers will go to exchanges and other fintech companies for those services.”

Many banks have already begun the process of rolling out cryptocurrency programs and have either launched cryptocurrency products or announced their intent to do so. But many more are evaluating the market and considering how to productize offerings around this emergent asset class. We [at Chainalysis] think of adoption by financial institutions in four phases, each with their own compliance and technology challenges. The phases are:

  1. Training staff on the landscape, understanding the cryptocurrency businesses their customers interact with, and taking on cryptocurrency businesses as clients.
  2. Offering synthetic cryptocurrency products like Greyscale Bitcoin Trust and eventually cryptocurrency ETFs [or exchange-traded funds that track the price of one or more digital assets].
  3. Offering custodial services [which manages and safekeeps a customer’s currency and digital assets].
  4. Other services like crypto collateral-based loans, payments products, and trading desks.

We offer more details and examples on these in our “Crypto Maturity Model” report here.

The following graphic was adapted from Chainalysis’s “Who’s Who on the Blockchain” (2021) report to include critical actors and countries involved in each part of the cryptocurrency ecosystem. It portrays the complex structures within the crypto world and underscores the necessity to secure and regulate each component individually according to its unique characteristics.

Source: Chainalysis

Explore the Ecosystem

  • Mining
    pools

    +
  • Wallets

    +
  • Exchanges

    +
  • Cryptocurrency
    ATMs

    +
  • Merchant
    services

    +
  • Over the counter
    desks

    +
  • Nested
    services

    +
  • Cyber infrastructure
    as a service

    +
  • Decentralized
    finance

    +

Mining Pools

What: Miners may pool their resources together to validate and add transactions to the blockchain in exchange for newly generated cryptocurrency. Mining is key for regulating cryptocurrency issuance and maintaining blockchain security.

How: Previously, it was possible for an individual to mine new coins using their personal computers, but due to increased competition, miners now form mining pools to combine their collective computing power to increase their chances of success at solving complex computational mathematical problems.

Risk: Some mining pools accept deposits, which could enable money laundering.

Emerging trends: Corporations and large mining pools are increasingly dominating mining.

Mining Pools by Hash Rate 2020–2021

Source: BTC.com

Wallets

What: Wallets keep a user’s private keys (or the passwords that gives access to the user’s cryptocurrency) safe and accessible. This allows a user to send and receive cryptocurrencies.

How: Cryptocurrency holdings live on a blockchain but can only be accessed using a private key. Keys prove ownership of digital money and allow transactions. It is important to keep keys safe, otherwise another user may access another’s money. A key can be written on physical medium such as paper (paper wallets), stored on hardware such as a thumb drive (hardware wallets), or stored on an app or other software (online wallets). The information stored on a wallet is comparable to a PIN one may use to login to a bank account to store, send, and receive digital assets.

Hosted wallets

What: Hosted wallets store keys in a wallet infrastructure owned and maintained by a wallet service provider. The user experience is like a traditional banking and finance website and makes it easier for users to access their keys to conduct transactions.

Risk: Scammers can set up malicious websites impersonating popular hosted wallet services and can trick users into handing over their private keys.

Hosted Wallets by Monthly Usership
(2017–2021)

The global cryptocurrency asset management market size, which includes wallets, is projected to grow from $0.4 billion in 2020 to $1.1 billion by 2025 at a compound annual growth rate of 23.8 percent. North America is anticipated to account for the highest market share, with Canada and the United States as the major contributors to the market’s growth.

Note: The above wallets were chosen based on the total number of Android and iOS users from 2017–2021. Bitcoin Wallet, however, only includes Android users, because it is an Android-based app. Some users may use multiple wallets to manage their cryptocurrencies.

Source: AirNowData

Unhosted wallets

What: Also known as “non-custodial” or “self-hosted” wallets, users can store their keys on their own devices, giving them full control of their funds.

Risk: Users are responsible for maintaining the security of their keys against hackers or any other parties who would try to steal them and control their cryptocurrency holdings.

Exchanges

What: Online services that facilitate the buying, selling, and trading of cryptocurrency. Anti-money laundering and counter-terrorism financing (AML/CTF) standards vary among exchanges.

How: Exchanges vary in structure. Some are crypto-to-fiat (allowing users to exchange fiat currency for cryptocurrency, and vice versa) and some are crypto-to-crypto (allowing for swapping among different types of cryptocurrencies). They can be custodial or decentralized exchanges (DEXs), where users have varying degrees of control of their funds and their private keys associated with their wallets. Peer-to-peer (P2P) is the most common type of DEX, as it facilitates direct trades between individuals unlike centralized exchanges. DEXs are particularly popular in regions without a strong traditional banking structure, such as parts of Africa and Latin America.

Risk: Heavily targeted by hackers and used for facilitating money laundering.

Emerging trends: There has been growing use of DEXs that do not take custody of a user’s funds or hold their private keys associated with wallets. Instant exchanges are also an emerging trend.

Cryptocurrency Exchanges by Volume Share

There are currently 305 spot exchanges with a total 24-hour trading volume of $309.35 billion. The top 15 exchanges had a total trading volume of $48.46 billion as of September 14, 2021 (or 15.66 percent of all trading volume), suggesting that most cryptocurrency activities take place outside of major exchanges and that competition among exchanges is growing as there is more interest in cryptocurrency trading.

Note: Data is as of September 14, 2021. The following exchanges were chosen based on their rankings on CoinMarketCap, which ranks and scores each exchange based on traffic, liquidity, trading volumes, and confidence in the legitimacy of trading volumes reported.

Source: CoinMarketCap

Cryptocurrency ATMs

What: Also known as “cryptocurrency kiosks,” they are machines that convert cash to cryptocurrency (and vice versa). In comparison to fiat ATMs, cryptocurrency ATMs are generally regulated as virtual asset service provider (VASPs), defined by the Financial Action Task Force. Such regulations include the Travel Rule guideline, which guards against money laundering and other illegal actions for VASPs.

How: ATMs are essential to convert cryptocurrency into cash, but functional problems (such as ATMs not being online or running out of cash, and a limited number of ATMs) make it difficult for people to access cash with their cryptocurrency.

Risk: Malicious actors may convert their cash to cryptocurrency through cryptocurrency ATMs. Forty-one percent of the total cross-border bitcoin volume sent from U.S. VASPs went to VASPS with demonstrably weak Know Your Customer rules.

Emerging trends: Growing number of cryptocurrency ATMs with more variety of cryptocurrencies available.

Bitcoin ATMs Distribution by Country in 2021

Currently, there are 27,299 cryptocurrency ATMs across 74 countries, with most offering Bitcoin, Bitcoin Cash, Ether, Dash, and Litecoin.

Source: Coinatmradar

Merchant Services

What: Acts as intermediaries between a merchant and customer to provide cryptocurrency payment services. Some allow businesses to buy cryptocurrencies with credit cards or debit cards.

How: A merchant service provider receives a cryptocurrency payment from a customer on behalf of a merchant. The merchant will then receive funds via immediate settlements to their bank account or may choose to settle in cryptocurrency.

Risk: Malicious websites can be registered to accept cryptocurrency payments that are processed by merchant services.

Emerging trends: As cryptocurrency becomes increasingly popular, merchant services are also growing in volume, and more businesses are accepting cryptocurrency as payment.

Businesses Offering Cryptocurrency Payments in the U.S. in 2021

The following graphic shows by industry, the number of businesses in the United States that either have a cryptocurrency ATM or offer cryptocurrency as an in-store payment method.

Note: Due to data limitations, publicly available data is as of March 2021. The numbers provided are Statista estimates based on information from OpenMap.org, using software from Nominatim.

Source: Statistica

Over the Counter Desks

What: Facilitate large trade deals between individual buyers and sellers who cannot or do not want to transact on an open exchange.

How: OTC brokers work directly with customers and negotiate the conditions for selling and buying. They are a critical source of liquidity in the cryptocurrency market, but due to the private nature of transactions where most are anonymously orchestrated by the broker, the total size of the market is unknown. Some estimate that OTCs could facilitate most of all cryptocurrency trade volumes.

Risk: Often, OTC brokers have lax Know Your Customer standards, enabling some to facilitate money laundering. OTC desks also do not provide a public order book listing all trades, so large sums of money can be moved quietly without the potential of disrupting the market.

Emerging trends: OTC trading is becoming increasingly popular to exchange large amounts of cryptocurrency anonymously, particularly for wealthy individuals and large corporations or hedge funds. Many exchanges have launched their own OTC desks for institutional clients.

OTC Brokers

Broker Locations Minimum Trading Size Digital Assets
B2C2 United Kingdom $50k 7 cryptocurrencies
Bitstocks United Kingdom $6.88k Bitcoin
Circle Trade Hong Kong, United Kingdom, United States $250k Bitcoin, Bitcoin Cash, Ethereum
Cumberland Mining United States $100k +30 cryptocurrencies and 4 fiat currencies
Enigma Securities France, Gibraltar, Israel, Singapore, Switzerland, United Kingdom, United States No data +7 cryptocurrencies and 4 fiat currencies
Genesis Trading United States $75k 7 cryptocurrencies
IBC Group UAE, United Kingdom, United States No data Bitcoin, Litecoin, Ethereum
itBit United States $100k 7 cryptocurrencies
Octagon Strategy Hong Kong No data No data
QCP Capital Singapore No data No data
SFOX United States No data No data
XBTO Bermuda $350k No data

Note: Due to the nature of the sector, the market share for OTC brokers is not publicly available. The following graphic shows some of the larger OTC brokers. All information has been taken from the companies’ website.

Source: Capco

Nested Services

What: Third-party businesses that operate within one or more of the largest exchanges. One analogous example is a hotel booking website that aggregates hotel room rates and offers them under one platform.

How: Nested service providers set up accounts on major exchanges, then act as middlemen to facilitate transactions.

Risk: Some exchanges do not hold nested services to high compliance standards, and in some cases, they can mask illicit activity within the overall pool of transactions from the parent exchange.

Emerging trends: Over-the-Counter brokers and instant exchanges are nested services, but both can operate independently as stand-alone services. Nested services are increasingly involved in money laundering.

Examples of Instant Exchanges

An instant exchange is a real-time trading decentralized currency exchange system that aggregates prices and liquidity from multiple custodial trading exchanges. Users are notably responsible for the security of their assets, whereas traditional exchanges manage users’ private keys and overall security.

Company Location
ShapeShift Switzerland
Changelly Czech Republic
SimpleSwap Marshall Islands
Coinswitch India
ChangeNOW Seychelles

Note: Instant exchanges are emerging sets of nested service providers, and due to data limitations, this graphic shows examples of such exchanges and their locations.

Source: Hackernoon

Cyber Infrastructure as a Service (Iaas)

What: Provides infrastructure for computing and information services, including VPN providers, VPS hosting providers, and other popular types of digital infrastructure.

How: Users sign up for services and pay for a subscription in cryptocurrency. Anonymity services are a category of products and services that allow users to maintain an internet business or presence with greater privacy.

Risk: Some services may be used by criminals to conduct hacks, such as ransomware and other types of cyberattacks. Anonymity services are attractive to cybercriminals due to the enhanced privacy.

Emerging trends: IaaS providers are increasingly becoming implicated in ransomware attacks.

$74.64 billion

The global IaaS market is anticipated to reach $74.64 billion in 2025 at a CAGR of 13.8 percent. But due to privacy and data security concerns, such as data leaks, compromised accounts, interface and API hacking, in the short term, the market is expected to decline from $59.94 billion to $44.44 billion in 2021.

Decentralized finance (DeFi)

What: A class of cryptocurrency platforms that run autonomously without the support of a centralized entity. Popular DeFi tech categories include ERC-20 tokens which are blockchain-based assets that can be sent and received using an Ethereum wallet, decentralized exchanges (allow users to buy, sell, and swap different tokens built on a specific blockchain directly between one another’s wallets for greater privacy and security), and DeFi lending platforms (allow cryptocurrency holders to pool their assets so they can be loaned out to others).

How: Often, DeFi platforms are built on top of smart contract-enriched blockchains, primarily Ethereum, and can fulfill financial functions determined by the smart contract’s underlying code. Smart contracts execute transactions such as trades and loans automatically when certain conditions are met. They also replace centralized infrastructure and human governance. Such platforms often execute financial transactions at lower fees than other fintech applications or financial institutions.

Risk: Vulnerabilities in smart contract codes and potential for money laundering.

Emerging trends: Non-fungible tokens (NFTs), flash loans, and yield farming.

76%

DeFi-related hacks made up 76 percent (or $361 million) of major hack volume in the cryptocurrency arena this year. This is 2.7 times more than in 2020.

Top Decentralized Marketplaces by Volume

As of September 14, 2021, the total DeFi cryptocurrency market cap was $127.62 billion with OpenSea as the top digital marketplace over the past 30 days. In August 2021, OpenSea recorded over $3.4 billion in transactions across 1.67 million NFTs, demonstrating the recent exponential growth of the NFT market. The most popular NFTs sold on OpenSea of all time are CryptoPunks, an art NFT collection where only 10,000 were minted. A collection of nine punks were sold for $17 million in May 2021.

Note: Data as of September 14, 2021 and represents total trade volume over the last 30 days.

Source: Dapp Radar

$150,000

In August 2021, Visa entered the NFT space and bought a “CryptoPunk” for $150,000. CryptoPunk has become one of the most expensive NFTs currently available. While some have viewed Visa’s move as a signal that institutions are seeking to enter the nascent NFT space, others argue that this demonstrates institutions’ intention to capitalize on a new digital commerce category.

Section 3

Cryptocurrency as a Tool to Access the International Financial System

With thousands of coins in circulation, their utilities and values for countries vary widely. Developing countries in Central and South Asia, Latin America, and Africa are driving native cryptocurrency adoption and usage through peer-to-peer (P2P) payments, electronic money transfers made from one person to another directly, without the involvement of a third party. According to a 2021 report, global adoption has grown by over 2,300 percent since 2019 and over 881 percent from 2020 to 2021, with Vietnam, India, and Pakistan demonstrating the greatest levels of P2P usage. As of January 2021, Asia has the greatest number of users at 160 million, followed by Europe at 38 million and Africa at 32 million.

Individuals in these countries are turning to cryptocurrency in the face of currency devaluation, as well as for sending and receiving remittances and carrying out business transactions. Moreover, for users who wish to opt out of the existing financial infrastructure and the various forces seeking to control it, particularly in authoritarian regimes, crypto is appealing because it theoretically takes monetary-management decisions—and the power to abuse them—away from a single entity. By contrast, developed countries in North America, Western Europe, and East Asia are powering crypto adoption through institutional investment and trading rather than P2P transactions, as well as driving the development of the DeFi market. The United States, for example, dropped from sixth in P2P trade volumes to eighth from 2020 to 2021, according to Chainalysis, but in terms of DeFi adoption, the United States is the leading country, followed by Vietnam, Thailand, and China.

Section 3
Key Takeaway

  1. Developing countries are leading cryptocurrency adoption.

    Developing nations that suffer from inflation and currency devaluation and rely on remittances are particularly benefitting from cryptocurrency and leading P2P transactions. Despite the price volatility of native cryptocurrencies, individuals in these countries use cryptocurrency to access to the financial system in ways that may not have been available due to national or regional economic constraints. This is particularly true for countries with authoritarian regimes whose economic oversight may constrain citizens’ financial activities.

Graphic 6

Global Cryptocurrency Adoption 2021

As of January 2021, there were an estimated 300 million cryptocurrency users worldwide, with over 18,000 businesses accepting cryptocurrency payments. Bitcoin dominates the cryptocurrency market, currently making up 41.5 percent of the market capitalization, or $904.72 billion as of September 15, 2021.

Note: Country ranking is based on Chainalysis’s September 2020 report, “The Chainalysis 2020 Geography of Cryptocurrency Report.” Estimations of numbers of users per country are based on analytics from the Central Bank of Canada.

Source: Triple A and CoinMarketCap

Vietnam Leads Global Cryptocurrency Adoption +

Vietnam, which is overall gaining heightened attention from private companies for its business-friendly regulatory environment and young talent, is leading global cryptocurrency adoption largely because it offers cryptocurrency as a method to send remittances to Vietnam without high exchange rates or transaction fees associated with traditional financial transactions. In 2020, Vietnamese abroad sent home $17.2 billion in remittances, making the country the third-largest remittance recipient in East Asia and the Pacific region, behind China and the Philippines.

The Vietnamese also have a long history of distrust of the Vietnamese dong; such concerns are backed by the IMF, which recently called out the State Bank of Vietnam for attempting to gain an unfair competitive advantage through competitive devaluation of the dong. (In August 2021, the U.S. Department of the Treasury announced that it would not impose punitive tariffs on Vietnam for its currency practices following an agreement with Vietnam to make its monetary and exchange rate policies more transparent.) Currently, the Vietnamese government does not allow cryptocurrency to be used as a means of payment, but the cryptocurrency industry in the country remains largely unregulated, therefore allowing outflows of money from the economy. The government’s refusal to recognize cryptocurrency has fostered a black market that has cultivated an environment of corruption, illegal transactions, and potential foregone tax revenue as cryptocurrency is continuously used.

Afghans Turn to Cryptocurrency As Cash Sources Deplete +

Afghanistan’s banking system is in a state of collapse as hundreds of thousands of Afghans attempt to leave the country following the withdrawal of American and coalition troops this past August. In addition to a worsening humanitarian crisis, the country is suffering from cash shortages, closed borders, a plummeting currency, and rapidly rising prices of basic goods. Prior to the crisis, roughly 11 percent of Afghan citizens had a bank account, and the majority of the country’s banking was conducted through local unlicensed currency traders. Although the World Bank-funded project Afghanistan Payments System (APS), which was launched in 2011, sought to bring digital currency and banking to the country, the project stopped in August 2021 due to the chaos on the ground, and cash has quickly depleted. Limited access to cash has further been exacerbated by the U.S. Department of the Treasury, which froze the Afghan government’s offshore accounts, including its $7 billion in reserves, and the IMF has halted a $400 million aid disbursement to prevent the Taliban from gaining access. U.S. money-transfer services are also closely scrutinizing transactions, thus slowing money flows, and in August 2021 two companies halted overseas payments to Afghanistan altogether. As a result, some Afghans are turning to cryptocurrency as an alternative, using crypto accounts to transfer their money securely without having to go to banks that are plagued with long lines and increasingly unlikely to have cash. At the same time, there are growing concerns that the Taliban may also look to cryptocurrency if the country remains cut off from the international financial system.

Kazakhstan: A New Hub for Crypto Mining +

Kazakhstan has been attracting Bitcoin miners primarily because of its cheap electricity, cool climate (which helps with equipment maintenance during the mining process), proximity to China, and crypto-friendly regulations. (The government legalized crypto mining in December 2020.) In June 2021, following China’s ban on mining, Kazakhstan’s minister of digital development, innovation, and aerospace industry announced that the ministry is planning to attract $738 million worth of investments related to crypto mining by 2023. Some industry watchers predict that Kazakhstan will become one of the top three crypto mining destinations, along with the United States and Russia.

As discussed in Section 1, crypto mining is energy-intensive, and mining businesses can have hundreds of rigs, or computers that facilitate mining, in one location. In September 2020, for example, a 180-megawatt Bitcoin mining facility with 50,000 rigs was launched in Kazakhstan. For a single transaction, energy use ranges from an estimated 951 to 1,725 kilowatt-hours, the latter of which could power the average U.S. household for 59 days. Eighty-seven percent of Kazakhstan’s electricity is generated from fossil fuels, with coal making up more than 70 percent of the country’s capacity. Currently, the government plans to use 15 percent renewable energy in electricity generation by 2030 and 50 percent by 2050. In the span of six years, the country has increased its renewable energy capacity sixfold, to 1,650 megawatts in 2020. There are questions about whether the country will be able to reach its renewable energy goals, given limited foreign investments to upgrade such technology.

Unlike other industries, mining is relatively mobile, meaning that miners can search for new facilities where the cheapest electricity is located. As a result, miners can tap into “stranded” energy assets that cannot be put to productive use by other industries, such as renewables curtailment—when renewable energy capacity is turned off due to the availability of other sources. In those cases, miners are not competing with other industries or residential users for the same resources but rather using surplus energy that would have been lost or wasted. Digital asset investment firm Coinshares estimates that as of 2019, 73 percent of Bitcoin’s energy consumption is carbon neutral, largely due to the abundance of hydropower in major mining hubs, such as in China and Scandinavia. However, environmental groups are highly skeptical of this assessment, with the Sierra Club noting that miners often use hydropower because it is cheap, but hydropower plants are often backed up by fossil fuels. Moreover, as of 2019, China was the largest emitter of fossil fuel carbon dioxide, and coal accounted for about 58 percent of the country’s total energy consumption.

Nigerians Use Cryptocurrency Amid Growing Distrust of Federal Government +

According to Statista's Global Consumer Survey, Nigeria is the leading country per capita for Bitcoin and crypto adoption, with nearly one-third of Nigerians indicating that they used or owned crypto assets in 2020. Between July 2020 and June 2021, Africa received $105 billion worth of cryptocurrency, a growth of 1,200 percent. Nigeria's crypto sector, in particular, has exploded, in part due to uncertainty and instability around the Nigerian naira, which was devalued by 15 percent in March 2020. More recently, adoption in Nigeria grew following the government’s decision to freeze the bank accounts of leaders of the EndSARS protests in 2020. The protests called for the disbandment of the Special Anti-Robbery Squad (SARS), which was allegedly responsible for multiple cases of police brutality.

To help raise funds, activist groups such as the Feminist Coalition began accepting donations in bitcoin, with Twitter founder Jack Dorsey notably promoting donations via bitcoin to the #EndSARS campaign in October 2020. The combination of citizens’ distrust of the federal government, the country’s status as one of the world’s fastest-growing data-center markets in Africa, a relatively young and tech-savvy population, and poor economic conditions have driven citizens to turn to cryptocurrency as an alternative. While cryptocurrency is largely unregulated in Nigeria, the government has restricted financial institutions from providing cryptocurrency services since 2017, citing concerns related to its use in illicit activities. This policy notably contradicts the government’s stated efforts to build a digital economy around blockchain technology for long-term economic growth. Following the exponential growth in cryptocurrency transfers to and from Africa, the Central Bank of Nigeria announced in June 2021 that it is preparing a CBDC pilot program that could launch by the end of the year. Other countries have made similar moves amid growing competition among digital currencies, particularly between native cryptocurrencies and CBDCs.

Venezuelan Non-Profits Using Cryptocurrency to Provide Humanitarian Aid +

Venezuela suffers from inflation, which reached almost 9,586 percent in 2019, according to the country’s central bank. As of the time of publication, the price of a cup of coffee in Caracas had grown by 2,089 percent over the previous year, costing 7.66 million bolivars. In addition to experiencing hyperinflation, the economy has been dogged by U.S. sanctions. Since 2009, the United States has issued 431 sanctions on Venezuela, with the most recent measures by the former Trump administration designed to financially isolate the country by targeting its financial sector, natural resource exports, government officials, defense industry, commercial enterprises, sovereign debt, and individuals and entities associated with illicit activity. (The Biden administration has not imposed new sanctions, but it also has not taken steps to lift pre-existing ones.) Approximately 5.6 million Venezuelans have left the country due to the political turmoil, socio-economic instability, and the ongoing humanitarian crisis, and an estimated $2.4 billion worth of remittances entered the country from 2019 to 2020. 

Currently, Venezuela leads the Latin American region in cryptocurrency trading. Although the Maduro regime has attempted to use cryptocurrency to circumvent sanctions, local Venezuelans have used cryptocurrencies to bypass the president’s chokehold on the economy and to act as a hedge against inflation. Illustrative examples include non-profits such as Eat BCH and Bitcoin Venezuela, the latter of which feeds about 2,000 people daily through bitcoin donations. In 2019, NGOs began accepting donations in cryptocurrency to sidestep corruption and disruption in aid services following the president’s ban on foreign aid, which has the added benefit of almost no cost from intermediaries. Some commenters have noted that cryptocurrency could help improve the humanitarian aid model overall, particularly by increasing the speed and reducing costs of sending funds, as well as establishing greater accountability for those transfers—particularly given that corruption can prevent 30 percent of all development assistance from reaching its final destination. 

The efficacy and utility of cryptocurrencies vary across regional and country contexts, demonstrating that despite the industry’s technical, structural, and policy limitations, cryptocurrencies can also allow stakeholders to access the international financial system in ways that were previously unavailable due to regional or national economic circumstances. Moreover, cryptocurrencies present opportunities for investors and financial firms that are seeking to capitalize on this new asset class and leverage the emerging technology underpinning it to digitize and improve their services. But navigating this new frontier of finance also brings challenges for regulators, given that cryptocurrency moves financial activities outside of their purview, including oversight and enforcement mechanisms that protect consumers from malign actors and prevent illicit financial activities such as tax and sanctions evasion.

Case Study

A Shining Example or Dire Warning? El Salvador’s Experiment with Bitcoin

Since 2001, the U.S. dollar has been the official currency in El Salvador, which bitcoin will join (not replace), as legal tender, with the hopes that by doing so, it will attract investment, boost consumption, and reduce the cost of sending remittances for millions of Salvadorans working abroad. Having promulgated the “Bitcoin Law,” (Spanish version here), El Salvador is the first country to adopt bitcoin as legal tender and usable for all payments within the country.

Deep-dive into El Salvador +

Effective as of September 7, 2021, the law notably mandates:

  1. All businesses and organizations, unless they are technologically unable, must accept bitcoin as payment for goods and services (Article 7 and 12).
  2. The executive branch is responsible for building the infrastructure for bitcoin payments (article 10).
  3. A trust with the Development Bank of El Salvador has been created, allowing for liquidity between bitcoin and U.S. dollar (Article 14).

El Salvador has suffered from persistently low levels of economic growth. Since 2000, its annual growth has averaged 2.3 percent, leaving it with the second slowest economic growth rate in Latin America. According to USAID, its sluggish growth is due to its “uncompetitive business environment, anemic foreign direct investment, and dependence on remittances” which account for approximately 20 percent of the country’s annual GDP. Due to these challenges, the economy has underemployment and poverty rates above 25 percent. The COVID-19 pandemic has further exacerbated the economic conditions in El Salvador; its total gross external debt reached an all-time high of $18.46 billion in the third quarter of 2020. Last year, the country’s GDP plummeted by nearly 8 percent, likely further incentivizing the government’s decision to look to alternatives to support its economy.

President Naybi Bukele has argued that if one percent of Bitcoin’s market capitalization were invested in El Salvador, it would increase the country’s GDP by 25 percent while allowing the network to acquire “10 million potential new users,” which would provide an opportunity for the crypto industry to grow. Currently, emigrants send about $5.6 billion in remittances back to the country per year. Moreover, Bukele and other advocates have purported that cryptocurrency could serve as a vehicle for financial inclusion for the 70 percent of El Salvador’s citizens who do not have a bank account.

Beyond the stated objectives, regional experts note that the Bukele administration may be using the move toward Bitcoin to challenge the Biden administration, where officials have increasingly raised concerns regarding President Bukele’s authoritarian tendencies. This was observed in May 2021 when the legislature removed and replaced all the judges of the constitutional chamber of El Salvador’s Supreme Court, as well as the attorney general. The recent Bitcoin policy decision could be the Bukele administration’s way of asserting that while the two countries share a currency—the U.S. dollar—El Salvador will do things differently and without interference from the United States. However, Salvadorans do not seem to be eager to use bitcoin for their daily transactions. A survey in July 2021 found that 65 percent of people in the country would not be open to being paid in cryptocurrency, 54 percent view Btcoin adoption as “not at all correct,” and 46 percent of respondents knew “nothing” about Bitcoin.

El Salvador’s efforts follow a smaller cryptocurrency experiment called “Bitcoin Beach.” Established in 2019, the project was launched in the El Zonte by the donation of an anonymous Bitcoin adopter to demonstrate how to create a Bitcoin economy. Ninety percent of households interact with Bitcoin regularly in El Zonte, using it for daily financial activities, remittances, and small retail transactions. Throughout its implementation process, however, the project has faced numerous problems. Reports indicate that there have been internet issues due to the geographical location, limited prepaid credit on cell phones, which hindered people’s ability to use bitcoin; expensive fees to convert different currencies; and generation gaps where older individuals have liquidated their coins sooner than younger individuals, who have tended to hold theirs. Such problems may be further exacerbated at the national level, particularly since only 45 percent of Salvadorans have internet access, and around 10 percent of those in rural areas.

Challenges to Integrate Bitcoin into the Economy Are Mounting

The country is facing several challenges to realizing its Bitcoin ambitions. Once the law went into effect, El Salvador’s digital wallet, Chivo, suffered glitches and temporarily went offline, citizens had problems withdrawing money from ATMs, and the government reportedly was unable to send its promised $30 worth of bitcoin to users. Further exacerbating the shaky rollout, Bitcoin’s price plummeted by 17 percent (or $10,000), and trade decreased by 10 percent, underscoring the inherent volatility of the market. Citizens protested the adoption of Bitcoin, with some setting a Chivo ATM on fire. These hurdles came days following the government’s purchase of 400 bitcoins, which were worth about $21 million at the time. The public response suggests that for other countries that are seeking to integrate digital assets into their economies, a key hurdle will be in convincing citizens to shift their financial activities into the digital space.

One greater challenge is the lack of support from global financial institutions. The World Bank rejected the country’s request to support its implementation, citing environmental concerns, limited transparency concerning its use, and a weak regulatory framework. The International Monetary Fund (IMF) has also expressed skepticism regarding the country’s ambitions, pointing to the market’s price fluctuations as a key concern, given that its volatile nature may cause domestic prices to be highly unstable and challenge the country’s financial stability. Using cryptocurrency as legal tender can cause monetary policies to “lose [their] bite,” as well, since cryptocurrency is designed to circumvent regulatory authorities. Compounded with pre-existing concerns that digital assets can be used to facilitate illicit activities and undermine consumer protection, legalizing Bitcoin may impact El Salvador’s negotiations with the IMF as it considers a $1.3 billion proposal that seeks to lower the high costs associated with the country’s debt. The El Salvadorian Finance Ministry expects to reach an agreement with the IMF by the end of September 2021.

There are also limitations with the current technology that would be used to support El Salvador’s Bitcoin economy. To withdraw coins as cash, citizens need cryptocurrency ATMs. In August 2021, the government began installing 200 of these ATMs (up from four). But in June 2021, ATM company Athena Bitcoin noted that for an undisclosed period, various machines will need to be tested to determine which one is best for the country. In addition to pre-existing problems associated with ATMs (See: The Cryptocurrency Ecosystem), Bitcoin transaction fees vary daily. In April 2021, they rose to an all-time high of $62.78. Such a rate is untenable in a country where the gross national income per capita is $3,650.

The potential for corruption and embezzlement in El Salvador remains, presenting another risk to the integrity of the system. Although the government published technical standards in August 2021, concerning the implementation of the law, including anti-money laundering and Know Your Customer measures, such guardrails and cybersecurity standards warrant further attention, particularly since the government allocated $150 million to the trust that facilitates liquidity between Bitcoin and the dollar. According to the National Cyber Security Index (NCSI), which measures the preparedness of countries to prevent cyber threats and manage cyber incidents, El Salvador ranks 112th out of 193 with a calculated score of 19.48 out of 100, suggesting that its cybersecurity defenses may be insufficient to address these looming threats.

Bitcoin proponents have also expressed their concerns with El Salvador’s initiative. The law is vague and does not offer a definition of what type of Bitcoin will be mandated as legal tender, such as which genesis block or what consensus rules must be followed. As a result, individuals can attempt to pay retailors various types of Bitcoins, such as Bitcoin Cash or Bitcoin SV, and businesses must decide which to accept. When another change in the network occurs, since the country’s monetary policy also controls the activity of millions of users, the government may have to decide which type of Bitcoins to favor, contradicting a core principle of the coin’s ideology whereby a vast majority of people—not a single entity—drive the network’s decision-making.

Long Road Ahead

President Bukele’s administration has a long road ahead to set up the necessary infrastructure, educate the public on cryptocurrency, and establish the regulatory frameworks to manage the new legal tender. El Salvador, like many of its neighboring widespread, is facing a dire fiscal situation that was exacerbated by the pandemic, alongside violence from street gangs and transnational criminal organizations. As such, regional expert Julia Yansura, program manager for Latin America and the Caribbean at Global Financial Integrity, is not convinced as to whether Bitcoin can solve the country’s economic problems.

Further complicating the situation are reports alleging that the government may attempt to launch its own stablecoin cryptocurrency, called the “Colón dollar,” by the end of 2021. (Stablecoins differ from native cryptocurrencies in that they are pegged to fiat currencies, which determine their value. Bitcoin derives its price from its perceived value by the whole ecosystem and is prone to price fluctuations.)

While it is still too early to tell whether El Salvador’s experiment with Bitcoin will be successful, how the government manages this initiative will be either a shining example of what a cryptocurrency-based economy at the national level may look like, or a dire warning for other countries that are similarly considering moves to transition into cryptocurrency. Examples include Mexico, which has an active fintech culture and increased demand for financial services innovation; Cuba, whose central bank has embraced digital currencies and in August 2021 stated that it will set new rules for how to regulate them; and Panama, which proposed a “Crypto Law” in September 2021 that would make Bitcoin legal tender and expand the government’s use of blockchain technology. Private-public partnerships to tackle infrastructure and cybersecurity will be essential, and the regulatory framework used by El Salvador may shape how the rest of the world treats the industry.


Expert Q&A

Headshot of Kristin Smith

Julia Yansura

Program Manager, Latin America & the Caribbean, Global Financial Integrity

Q: Can Bitcoin help solve some of the economic problems El Salvador is facing?

“I think that there are a lot of needs that are unmet in El Salvador right now. There are perhaps other financial options that are better placed to meet those needs. To give you a few examples, if the banking system in El Salvador is not meeting financial inclusion needs, I would argue that community credit unions, which do exist in El Salvador and are quite well-regarded, could potentially step up and help meet that need. I would also argue that mobile money could step up and meet some of those financial inclusion needs.”

Listen to an excerpt from the interview

I understand the Bukele administration looking outside the box and trying to figure out this financial inclusion puzzle, but I’m not convinced that Bitcoin is necessarily the answer to those needs. It might be 10 years from now, 15 years from now. I don’t think it will be tomorrow for a lot of Salvadorians who are financially excluded [from using cryptocurrency]. Cryptocurrency is complicated. And I don’t think it’s necessarily a super-easy transition from not having a bank account, from not having any engagement with the financial system. I don’t think that the natural next step is to go out tomorrow and open a crypto wallet and embark on that journey. I think that that’s going to be a tough transition for those folks.


Headshot of Kristin Smith

Moises Rendon

Senior Associate (Non-resident), Americas Program, CSIS

Q: Do you think it is possible to create global regulations on cryptocurrency?

“At the end of the day, it’s not going to be a matter of governments or a top to the bottom system, which we have had [for] the last 200 years, now, where government set the rules, and people follow. I think this time around will be quite the opposite, where people will have to decide what money to use. And I think that’s where we are right now. People are more aware that many of their financial systems are broken.”

Listen to an excerpt from the interview

I’m not talking about the U.S. system, [where] everything worked fine, but in many developing countries, which is more than half of the population of the world, their money is broken. And they want an alternative that is efficient, that is transparent, that is easy to use, and is cost-efficient, too. Sending money from one part of the world to the other one costs a lot of money and time today. But with Bitcoin, you can really do it almost immediately, with very minimal fees. So, it’s a game-changer. And I think, again, the change will come from the bottom to the top, and the governments will have to adapt and regulate what is being used by their populations. And I think that’s the way that we will see how the financial system is transformed by people’s use of new tools like Bitcoin and not vice versa, not from governments.

We Want to Hear from You

Can an international agreement regarding cryptocurrencies be created? What measures should countries take in response to the rise of cryptocurrencies?

Section 4

For Regulators, Cryptocurrency Is a Competitor and Financial Stability Risk

Today, cryptocurrency is top-of-mind for regulators who are concerned about investor protections, systemic risk to markets from the integration of cryptocurrency with traditional finance, and loss of control over monetary policy. In July 2021, the Federal Open Market Committee, the monthly meetings of which are how the Federal Reserve Board sets monetary policy, discussed cryptocurrency and stablecoins as an official agenda item for the first time. In the meeting, some participants noted the risk that the expanded use of cryptocurrencies can have on financial stability, particularly on counterparties that are unable to convert collateral into cash during times of severe liquidity stress.

Regulators have varying perceptions of the financial stability risk posed by cryptocurrency. St. Louis Federal Reserve president James Bullard, for example, asserted that current trends are a sign of “currency competition, and investors want a safe haven,” but the non-uniformity of the sector makes it difficult for cryptocurrencies to be used a medium of exchange. Therefore, they do not pose much of a threat to the dollar. The European Central Bank echoed these sentiments, noting that crypto’s “price volatility makes Bitcoin risky and speculative, while its exorbitant carbon footprint and potential use for illicit purposes are grounds for concerns,” but also that “crypto-assets are still not used widely for payments, and euro area institutions have little exposure to crypto-linked financial instruments, so financial stability risks appear limited at present.” By contrast, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, asserted that while cryptocurrency assets do not pose a material risk to global financial stability at this time, “should the use of crypto assets continue to evolve, it could have implications for financial stability in the future.”

Section 4
Key Takeaways

  1. Crypto’s rise is driving tech innovation from institutions, including CBDCs.

    With the recent growth in the industry and heightened attention from key financial players, governments and legacy systems are responding with new financial innovations to keep up with the new technology and systems. For example, in response to Ripple’s XRP, SWIFT created SWIFT Go. Many countries are also now accelerating their development of CBDCs in a race to determine which digital currencies consumers will widely accept.

  2. Cryptocurrencies and CBDCs can potentially complement one another.

    Given the multifaceted purposes that various coins and tokens provide, the industry largely does not view itself to be in competition with the public sector. Instead, it has called for enhanced public-private partnerships to help improve weaknesses in the financial sector. Some analysts anticipate that individuals will hold various types of digital currencies according to their needs.

  3. China’s strict regulations are an outlier, but other countries may follow.

    In China, cryptocurrency is not currency, but blockchain is viewed as a critical new development of digital technology and is promoted. While it is still too soon to tell, some countries may follow China’s lead and divorce the idea of cryptocurrency from blockchain technology to develop and ensure the adoption of their own CBDCs.

Expert Q&A

Headshot of Winston Ma

Winston Ma

NYU School of Law; Author of The Digital War

Q: Are cryptocurrencies challenging governments’ central bank digital currency ambitions?

“I think to the ambition of crypto supporters, the goal is to expand the reach of crypto assets. And they would like to use the term “cryptocurrencies,” because they envisioned that going forward, the cryptos will become the currency of the future financial system, or even more broadly, the future world.”

Listen to an excerpt from the interview

However, from the government regulator’s perspective, it’s quite the opposite. From the regulator’s perspective, the crypto transactions should be covered by government regulations, and they should all become part of the overall government-led financial system. And to that end, they want to create their own sovereign digital currency, which, of course, will be stable. So, you could envision that the government digital currencies would become another kind of stablecoins, and then they will take away the market share of digital transactions.

So, I would say the end goals of the crypto developers and the government regulators are in direct competition. And with that, with more than 80 countries…developing their own sovereign data currencies, you could say that the cryptos must compete with the emerging government digital currencies for their room to grow.

Indeed, the risks that cryptocurrencies pose to the global financial system remain an open question. But the rise of cryptocurrencies has unleashed a wave of financial innovation. Ripple, for example, created its first coin in 2012 to be an alternative (and potentially a replacement) to the SWIFT system and “the settlement layer between major financial institutions.” In response, SWIFT launched SWIFT gpi (global payments innovation) in 2017, a new standard that facilitates quicker payments with full transparency on costs, with the goal of improving international transactions. As of 2021, more than 4,000 financial institutions use SWIFT gpi, sending over $300 billion daily across over 150 currencies. In 2021, the SWIFT network also established SWIFT Go, a platform that enables SMEs and consumers to send fast, predictable, secure, and low-cost cross-border payments around the world—a service that notably competes directly with the XRP network.

Rapid innovation in cryptocurrencies and payment systems is putting pressure on institutions to transition toward the digital realm. Although the dollar is highly unlikely to become obsolete, fiat currencies, conventional banks, and financial institutions face more competition from cryptocurrencies, which are fundamentally challenging the role of central banks in the international financial landscape. CBDCs, in part, attempt to solve the challenges posed by crypto by presenting digital versions of fiat currency. While Western countries have expressed concerns regarding the privacy issues with respect to CBDCs, 81 countries representing over 90 percent of global GDP (up from 35 countries back in May 2020) are now exploring a CBDC to accommodate to a new digital age and to maintain their reserves.

In May 2021, U.S. Federal Reserve Board chair Jerome Powell announced plans to explore the potential benefits and risks of CBDCs, signaling that regulators are attempting to address the growing popularity of non-traditional currency options such as cryptocurrency by introducing their own digital currencies. More recently, in a September 2021 speech, the Bureau of International Settlements (BIS) Innovation Hub head, Benoît Cœuré, called for central banks to hasten their timelines to develop CBDCs, stating that “the time has passed for central banks to get going. We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design. CBDCs will take years to be rolled out, while stablecoins and crypto assets are already here. This makes it even more urgent to start.” So far, Australia, Malaysia, Singapore, and South Africa are working with the BIS Innovation Hub to test the efficacy of CBDCs issued by multiple central banks in cross-border settlements, known as “Project Dunbar.”

Economists warn that if people lose trust in fiat currencies, and institutions are unable to adapt to increased demand for digital forms of financial activity, cryptocurrency may be seen as a safe store of value. Thus, if the current financial system is unable to innovate, even for a transitory period, cryptocurrencies potentially can become the preferred reserve currency for countries around the world. Some of the most bullish advocates predict that Bitcoin will overtake the U.S. dollar within the next few years, while others are more measured, but still projecting the same outcome by 2050.


For the Crypto Industry, there is No Competition Among Digital Currencies

The industry notably does not share the perception of regulators that there is a race among different currencies to decide which ones will dominate the financial landscape or that there is a sense of threat among cryptocurrencies, CBDCs, and other coins being developed in the private sector. Technologists and industry leaders assert that cryptocurrency is not meant to be a replacement for the exiting financial system. Instead, it is an alternative for consumers to opt out of the current financial system to address the specific needs of their individual financial situations, including for long-term investment, hedging against inflation and other economic trends, powering DeFi initiatives and tools, trading, or simply fun and speculation. Some industry leaders, such as co-creator of the stablecoin Diem Christian Catalini, have stated that CBDCs and cryptocurrencies should complement one another to “provide new types of digital payment rails and increase competition in payments . . . so that [consumers] have more choice and lower costs.”

Expert Q&A

Headshot of Marta Belcher

Marta Belcher

Board Chair, Filecoin Foundation

Q: Are cryptocurrencies in competition with central bank digital currencies?

“I would say, first of all, I do have concerns from a civil liberties perspective, about whether central bank digital currencies are really going to be able to protect privacy, or whether [they] will move us to a world where all transactions are effectively surveilled by the government. So, I do have CBDC concerns generally.”

Listen to an excerpt from the interview

And in terms of governments thinking that cryptocurrency is a threat to CBDC, I think that it’s not intended to be a threat to CBDCs, just like gold is not a threat to the U.S. dollar. Having multiple versions—multiple stores of value—doesn’t mean that any particular of store value is less valuable, it’s just different. We have gold, we have silver, we have bronze. So, I don’t really see it as being a threat, but I also think that if CBDCs are competing with cryptocurrencies, it’s a good thing for us to have multiple alternatives—not a bad thing.


Headshot of Christian Catalini

Christian Catalini

Co-creator of Diem and Chief Economist of the Diem Association

Q: Are cryptocurrencies and CBDCs in competition with one another? Can they co-exist in the same system?

“Public and private sector efforts in relation to digital currency should complement each other rather than compete with one another. With appropriate regulation, private entities could issue stablecoins and provide novel types of digital payment rails that increase competition in payments.”

Listen to an excerpt from the interview

This is very needed both for businesses and consumers and can bring more choice and lower costs. While the public sector, of course, is best positioned to ensure the stability of value and sound monetary policy, money is distributed today through private institutions, and 95% of money in developed economies is privately created. This comes with public guarantees such as FDIC insurance.

To the extent that the public sector identifies areas that actually require public intervention, it could deploy a CBDC "coin" to address potential issues related to universal access, interoperability, privacy, or competition. In a world where all payments are digital, how do you ensure that consumers still have access to a central bank liability like they have today with cash? How can we ensure that different payment networks are truly interoperable, and that you have a level playing field between large and small players? These are all questions the public sector can address, and I do believe there's an important role for the public sector in this area. But I'm also not sure that the approach of deploying an entirely public solution, as it is being discussed in Europe for example, will be the most productive. Of course, you have China doing it, but that model and the trade-offs it entails, for example on privacy, will not work for other countries. For a number of countries such as the US, UK, and EU, a much more promising approach could be a hybrid solution where you have both public and private sector participation. Well-regulated stablecoins would be a key first step in that direction.

Kim Grauer, director of research at Chainalysis, echoed the industry’s comments, arguing that CBDCs serve different purposes compared to native cryptocurrencies, the use cases for which vary by coin. However, China is a notable exception, given that the CCP has banned native coins while investing in its own digital yuan. China has been an outlier in the regulatory landscape as one of the few countries with hostile policies toward the crypto industry, all the while developing and deploying a digital currency in pursuit of its own geostrategic goals. Although Chinese companies have historically been at the forefront of digital payments, the CCP is reasserting its control over financial innovation. Cryptocurrencies, especially those developed by the private sector, can threaten the digital yuan’s adoption, particularly given that developing countries in Africa and Latin America—regions that are also critical to the China’s Belt and Road Initiative (BRI)—are leading global cryptocurrency adoption.

Expert Q&A

Headshot of Kim Grauer

Kim Grauer

Director of Research, Chainalysis

Q: Are cryptocurrencies in competition with central bank digital currencies? If so, are there any countries that are interested in preventing the rise of cryptocurrencies?

In general, [Chainalysis does] not see existing cryptocurrencies like Bitcoin challenging CBDCs. They can exist side-by-side and are not necessarily competitive. Rather, they can serve different purposes. One exception is in China.

China has banned Bitcoin and other global public cryptocurrencies while investing in its own CBDC. China appears intent on developing a digital yuan for immediate domestic use, and possibly future international use. Improved monetary policy and financial surveillance of Chinese citizens appear to be the project’s short-term goals, but in the long term, the proliferation of the digital yuan alongside other CBDCs could compromise the U.S. dollar’s status as the world’s reserve currency.

Chinese Regulators Crack Down on Cryptocurrency
Amid Financial Stability Concerns

When Bitcoin was first introduced in 2008, China viewed it as a potential financial tool that consumers can use to further the country’s economic development. Sale Lilly, a senior policy analyst from the RAND Corporation, commented, “[China’s] citizens loved it, and then there’s this narrative of tension between a regulator and the people. I think among the regulators, there was also concern that native cryptocurrencies could be an effective tool, and it could be a part of China broadening its financial regulatory abilities by increasing the number of financial instruments available to people.” But since 2013, with the rise of native cryptocurrencies and crypto assets that are managed by the private sector, such as Facebook’s Diem, there is increased concern that decentralized currencies could pull economic activity away from the renminbi. As a result, the CCP has adopted an increasingly restrictive regulatory approach, notably starting in December 2013 when regulators banned financial institutions and payment companies from providing services related to cryptocurrency transactions. Below is a timeline of China’s activities related to cryptocurrency.

China’s Activities on Cryptocurrency, 2009 –2021 +

June 2009: The Ministry of Culture and Ministry of Commerce bans digital currencies from being used to buy goods and services in an effort curtail video game currencies subverting the yuan.

June 2011: Chinese Bitcoin exchange BTCC is launched after its first-ever crypto exchange.

April 2013: With the One Foundation, a Chinese private charitable organization operated under the Red Cross Society of China, which is controlled by the Ministry of Health, announcing that it will accept donations in bitcoin, China becomes of the earliest countries to embrace cryptocurrencies. At the time, the organization receives $30,000 worth of bitcoin, making it one of the most successful charities accepting bitcoin. Chinese interest in Bitcoin grows as a result.

2013: Companies such as Bitmain, one of the largest cryptocurrency mining equipment manufacturers by share of global hash rate, and Huobi, the third-largest cryptocurrency exchange by trade volume as of September 2021, are established.

December 2013: Chinese regulators issue a “Notice to Prevent the Risk of Bitcoin” (also known as the “2013 Bitcoin Notice”). It bans banks and domestic exchanges from transactions involving cryptocurrency despite Chinese investment driving a 5,000 percent appreciation in Bitcoin. The China Securities Regulatory Commission (CSRC) cites concerns regarding the coin’s inherently speculative nature, asserting that Bitcoin is a type of virtual product that does not have legal status as currency. The note emphasizes the threats that Bitcoin poses to the country’s financial stability, stating that restrictions are needed to “protect the status of the renminbi as the statutory currency, prevent risks of money laundering, and protect financial stability.

2014: The People’s Bank of China (PBOC) begins research on the digital yuan.

August 2015: Four Chinese mining pools (F2Pool, AntPool, BTCC Pool, and BW.com) account for half of the Bitcoin network’s hash rate.

November 2016: A weakened Chinese yuan leads to a surge in Chinese investment into cryptocurrency, causing prices to grow.

September 2017: The PBOC and other Chinese federal agencies publish the Announcement to Prevent the Risk of Initial Coin Offerings (also known as the “Cryptocurrency Rules”). Initial coin offerings (ICOs) and domestic Bitcoin exchange activity are banned from accepting or using cryptocurrencies in payments or settlements, developing digital currency exchange services, or offering any such services to clients. The rules do not restrict OTC transactions, but many companies leave the country as a result.

October 2019: President Xi Jinping stresses the importance of blockchain investment for China’s technological and industrial ambitions. Xi specifically cites blockchain technology’s relationship to digital finance, the Internet of Things, smart manufacturing, supply chain management, and digital asset trading.

April 2020: China announces a nationwide blockchain network called the Blockchain Service Network (BSN). This comes alongside Chinese efforts to launch a digital yuan.

May 2021: The State’s Council Financial Stability and Development Committee issues a note entitled “Announcement on Preventing the Risk of Hype in Virtual Currency Transactions” that reiterates the previous bans from 2017. The committee criticizes the cryptocurrency market’s massive volatility, stating that digital tokens have “no real support value” and that prices are “extremely easy” to manipulate. The note prohibits Chinese financial institutions from offering crypto services and products but does not ban consumers from owning cryptocurrencies.

May 2021: Days after the regulatory note, the government shuts down all cryptocurrency mining operations, targeting for the Bitcoin mining enterprises first time and increasing restrictions on cryptocurrency trading. In addition to protecting the financial system, the move attempts to meet the country’s goals for clean energy and reduced carbon emissions. Regions such as Xinjian, Inner Mongolia, Sichuan, and Yunnan see increased cryptocurrency mining crackdowns.

June 2021: The PBOC requires firms and banks to shut down the accounts of individuals involved in cryptocurrency transactions and cease offering services such as account opening, registration, and trading for any cryptocurrency-related activities. Officials also ask local electricity companies to cut power supplies to crypto mining projects. BTCC, operating the country’s largest exchange, announces that it has completely exited from Bitcoin-related businesses.

July 2021: Cryptocurrency exchange operators Huobi and OkCoin announce that they will close their respective subsidiaries in China amid the latest crackdown on digital currencies. Bishijie, an online community for Chinese cryptocurrency investors, terminates its website and app in China.

July 2021: The PBOC publish a whitepaper entitled, “Progress of Research & Development of E-CNY in China.” The paper discusses China’s digital yuan and confirms that it will be programmable with smart contract features. It notably points to cryptocurrencies, specifically stablecoins launched by the private sector, as a “challenge to the international monetary system, payment and clearing system, monetary policies, [and] cross-border capital flow management.

September 2021: The Chinese government increases restrictions on cryptocurrency, declares that all financial transactions involving cryptocurrencies illegal and issues a nationwide ban on mining. All services that offer trading, order matching, token issuance, and derivatives for virtual currencies are prohibited. Cryptocurrency prices dropped as a result.

Actions by the Chinese government against the cryptocurrency industry suggest that China wants to completely cut crypto-related transactions out of its financial system. Regulators have expressed concerns about protecting investors, managing fraud, and risks to financial stability. However, more fundamentally, it is likely that the driving concern in China is private wealth accrual that the state cannot monitor. The CCP’s legitimacy is also closely tied to the country’s economic growth, which the government has touted as a key indicator of its rising status as a global superpower. As such, cryptocurrency can be seen as a challenge to the government’s economic development and stability, as well as to the Digital Currency Economic Payment (DCEP) program and is therefore perceived to be a challenge to the party itself. 

Despite the perceived economic risks of cryptocurrencies, the ecosystem has provided much of the native development for interest in blockchain and has helped stand up a new innovative technological sector that private companies, individuals, and governments are increasingly interested in and benefitting from. Thus, as governments around the world begin evaluating what regulations to impose on cryptocurrencies, they must consider what benefits cryptocurrencies can provide for their countries. In China’s case, the CCP has managed to separate its interests in blockchain technology and all its various applications (see President Xi’s speech on blockchain declaring “an important breakthrough”) from its interests in developing and deploying a digital currency, which notably is not blockchain-based, unlike existing native cryptocurrencies. 

India appears to be adopting similarly strict regulations toward cryptocurrency. The Reserve Bank of India (RBI), for instance, has expressed concerns about the illicit uses of cryptocurrency, and in 2020 its attempt to prohibit cryptocurrency trading was denied by the Indian Supreme Court. But in 2021, the government proposed stricter legislation called the Cryptocurrency and Regulation of Official Digital Currency bill, which would ban cryptocurrencies and fine individuals for trading or holding them. At the same time, commentators note that the bill will support the Indian central bank’s CBDC initiative, the digital rupee. In July 2021, the central bank announced that it may launch its first CBDC trial programs by December 2021. It is unclear whether India’s CBDC will use blockchain or DLT and whether it will be a retail (aims to act as cash) or wholesale (can only be used by financial institutions as a settlement asset) CBDC. Indeed, Prime Minister Nerenda Modi identified blockchain technology as a critical “frontier technology,” and while regulations may restrict crypto activities, India’s Ministry of Finance stated that blockchain will not be “shut off.”

Expert Q&A

Headshot of Winston Ma

Winston Ma

Adjunct Professor, NYU School of Law; Author of The Digital War

Q: Are there countries that are interested in preventing the rise of cryptocurrencies?

“In response to the rise of cryptocurrency, many countries are accelerating their development of the central bank digital currency. The best example is China. Recently, in July, China’s central bank released a white paper [detailing] the development phase of China’s sovereign digital currency. In this white paper, the central bank of China said specifically that the rise of the cryptocurrencies, especially the stablecoins, has created a threat to China’s financial system, and it is viewed as a main driver for China to develop its own sovereign digital currency.”

Listen to an excerpt from the interview

So, you could say that in countries like China, the rise of crypto has been a driver for the government to develop its sovereign digital currency. And maybe some countries would follow this same pattern, which means on one hand, the government will develop its sovereign digital currency and then trade globally. Right now, you have about 80 countries doing that. And at the same time, some countries may follow China [to crack down on the circulation of crypto assets in the financial system] just to make sure that in cyberspace, there’s only one legitimate digital currency, which is the government’s sovereign currency.


Headshot of Sale Lilly

Sale Lilly

Senior Policy Analyst, RAND Corporation

Q: Do you think cryptocurrency and central bank digital currencies can co-exist to the extent that they are deployed through China’s Belt and Road Initiative?

“I think they absolutely would. And there’s a positive story and a negative story to that. The positive story is that the financial market is robust enough to where they can transact directly, and so they may take a cryptocurrency. If you were working for a mining concession, and although Chinese SOEs [or state-owned enterprises] do not have a long or good history of being able to perform domestic employment, SOEs would push back.”

Listen to an excerpt from the interview

[These] Chinese SOEs would say that it is difficult to hire locally, just related to skillset mismatch, but let’s just say that there is effective employment of workers in these countries where [the] Belt and Road Initiative’s going forward. Potentially, it could be paid in central bank digital currency, but that also probably needs to be linked to a domestic currency.

The national sovereign in those countries might be reluctant to allow for renminbi to be the main payment, even if the digital renminbi is a payment network in the same way that SWIFT is a network. So, I could see that happening somehow. That’s the positive story. The market is functional enough to allow for transactions [among] cryptocurrency, the sovereign currency, and the digital renminbi.

…But my concern, if I was a citizen, would be that the digital renminbi is not a blockchain-enabled system and is not a public protocol, and that means that pay claw backs or irreversible payments [are] not guaranteed into the system. And part of the appeal of a digital native cryptocurrency that’s blockchain-enabled is that payment claw backs can’t or shouldn’t happen and that irreversibility of payments is guaranteed. Payment claw back, unless there was a hack on an enormous number of the nodes that facilitate it, can’t happen, and once you’ve made a payment, it’s yours. There’s no reversibility of that payment. There’s no guarantee of that in a digital renminbi system, or I would just say, if it’s not blockchain-enabled, and it’s a digital sovereign currency, whoever’s currency that is, there’s no domestic guarantee that a payment [is] irreversible.

…The risk of being on a digital sovereign currency or digital renminbi is that that payment might be reversible. That’s a long way of me saying that cryptocurrency does not allow for reversible payments, but that’s why I think they coexist for a good reason, because in the future, they may be a robust market to facilitate transaction[s], but they also coexist out of a concern that you may not be able to have your money always with you. And if there’s a reversible payment system, you wouldn’t want to be on that, or at least have all your income in that basket.

Section 5

Cryptocurrencies Are on the Rise, but Regulations Are Sorely Lacking

Globally, the regulatory landscape varies across jurisdictions, from strict bans on cryptocurrencies and their mining, to differing degrees of regulation, to no regulations at all. Many countries and international organizations are still in the early stages of considering the implications of digital assets, with regulatory bodies focusing on investor and consumer protection, market integrity, bank exposures, payment systems, financial stability, and anti-money laundering and combating the financing of terrorism (AML/CFT). The Financial Action Task Force (FATF), the intergovernmental body that sets global standards related to AML/CFT, issued its first guidance on virtual assets and virtual asset service providers in July 2019, which was in large part modelled after AML/CFT regulations that had already been rolled out in the United States.

However, cryptocurrencies and tokens have numerous uses and can be categorized as securities, commodities, or property, among other classifications. A legal vacuum arises, because coins and tokens do not always precisely fit with pre-existing traditional definitions. Due to the ambiguity surrounding crypto, government agencies, particularly those in the United States, are now competing for authority.

Section 5
Key Takeaways

  1. Illicit activities rare but remain a top concern for regulators.

    Actors are leveraging the cryptocurrency world to circumvent the existing financial system, serve as a payment vehicle for ransomware attacks, and generate additional revenue, particularly via crypto mining, as seen with Iran. Such activities account for billions of dollars and while pseudonymous cryptocurrencies are traceable, more attention must be paid to privacy coins, which provide greater anonymity.

  2. Investor protections are lacking even as more players enter the crypto arena.

    Many countries have issued warnings to investors and consumers about scams, pump-and-dump schemes, and market manipulation. However, inconsistent regulatory guidance, coupled with unique market structures that change daily, makes the market vulnerable to abusive practices. The lack of guardrails exacerbates these economic conditions and allows bad actors to operate with impunity.

  3. Security standards must be enhanced to protect this growing asset class.

    Due to the decentralized nature of the industry, it is difficult to standardize security across the entire ecosystem. Policymakers should work with the CCSS Steering Committee to establish comprehensive cybersecurity frameworks to ensure that the entire cryptocurrency transaction flow is protected.

  4. Cryptocurrency transactions are highly energy intensive.

    Bitcoin uses more energy per year for transactions than Ethereum and Ripple, consuming 342 times more energy than Ireland’s entire annual energy use, 195 times that of Singapore’s, and over a third of Australia’s. Some argue that the industry can drive renewables, but more work must be done through multistakeholder and international forums, such as the Crypto Climate Accord, and research and development to create greener technology for the industry and support for the energy sector’s transition to renewables to prevent the catastrophic effects of carbon emissions.

Expert Q&A

Headshot of Susan Friedman

Susan Friedman

Head of Public Policy, Ripple

Q: What do you think are some of the main challenges for regulators in the cryptocurrency space?

The main challenge for regulators will be establishing coherent rules for cryptocurrencies that properly account for innovation and technological change, as well as substantial consumer and business demand for these new technologies and payment options. Providing regulatory clarity on the general rules of the marketplace is essential for the industry.

An ad hoc approach that prioritizes regulation by enforcement will only send successful businesses to jurisdictions that welcome their jobs, investments, and innovation. Jurisdictions that fail to enact regulations will fall behind countries like Singapore, Japan, UK and Switzerland - all of which have established clear regulatory and licensing frameworks - or worse, cede the advantage to hostile countries like China. The challenge i s for regulators to provide clear rules of the road to foster innovation and growth around these technologies.

Another major challenge will be diverging regulations across countries and regions of the world. Generally, we are seeing three types of crypto regulatory postures: closed system for the Chinese market, open and liberal for the Switzerland market, and open and strict system for the U.S. market.


Headshot of Clark Flynt-Barr

Clark Flynt-Barr

Senior Policy Analyst, Chainalysis

Q: What are the top three priorities for regulators regarding cryptocurrency?

  1. AML/CFT: It is a common misconception that cryptocurrency is unregulated. AML/CFT regulations for cryptocurrency are either already in place or are being implemented in jurisdictions around the world. The United States has been a leader on this front—cryptocurrency has been regulated under the Bank Secrecy Act since 2013. The Financial Crimes Enforcement Network [FinCEN], the bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions, has likely put out more advisories and interpretive notes on cryptocurrency than any other agency in the world.
  2. Clarity from Regulatory Agencies: Agencies, particularly the Securities and Exchange Commission [SEC] and the Commodity Futures Trading Commission [CFTC], agree that it is time to ensure that cryptocurrency is regulated appropriately, but what that entails remains an open question. Both agencies must work with a broad array of industry members and associations to ensure that the measures they are considering are well thought out and promote both accountability and innovation.
  3. Clearer and Simpler Tax Rules: In 2014, the Internal Revenue Service (IRS) declared that “virtual currency,” such as Bitcoin and other cryptocurrencies, is to be treated as property (not as currency) for federal tax purposes, and that the general principles applicable to transactions involving property apply to transactions involving virtual currency. While the IRS has put out some guidance on this, it is very complicated to calculate what taxes are owed on cryptocurrency. Clarity is still needed in other areas, such as how staking rewards are taxed, [as highlighted by] the recent Tezos staking case [where investors sued the IRS regarding taxes they had paid on rewards for creating and holding on to a cryptocurrency rather than selling or exchanging the asset.] The complexity here makes it difficult for individuals to comply with the [U.S.] tax code. 

Emerging technologies and new actors in the crypto ecosystem are challenging regulators more than ever, but the lack of policy frameworks is leaving regulatory gaps that malign actors are exploiting, leading to billions of dollars in losses and creating opportunities for other countries to step in as the standard-setters of the digital currency ecosystem. While some countries may follow China, the industry has pointed to the Monetary Authority of Singapore (MAS), the Swiss Financial Market Supervisory Authority (FINMA), the United Kingdom’s Token Taxonomy Act (which specifies that digital tokens are not securities), the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, and the U.S. Presidential Working Group on Financial Markets as examples of regulatory bodies and frameworks that can create a potential model for clearer regulations and forums for continued discussions and high-level engagement between the public and private sectors.


Illicit Activities Are a Top Concern for Regulators

Due to several high-profile incidents, the industry has been closely associated with illicit and criminal activities. Although cryptocurrency attracts some nefarious actors, primarily due to its pseudonymous nature and ease with which it allows users to instantly send funds anywhere in the world, a recent study by former Central Intelligence Agency (CIA) acting director Michael Morrell argues that “the broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.” From 2012 to 2020, the illicit activity of Bitcoin was less than 1 percent of total cryptocurrency activities. Other studies by Chainalysis estimate that this figure is even lower, with illicit activity making up less than 0.5 percent of total transaction volume in 2020. 

This 1 percent, however, accounts for $10 billion in transaction volume and is a primary concern for regulators. In 2013, for example, the Federal Bureau of Investigations (FBI) shut down Silk Road, an extensive internet-based criminal marketplace that was used by thousands of drug dealers and other unlawful vendors. At the time it was taken down, Silk Road had nearly 13,000 listings for controlled substances and many more for illegal services, such as computer hacking and murder for hire, generating sales revenue totaling over 9.5 million bitcoins and commissions totaling 600,000 bitcoins. Cryptocurrency is also the payment vehicle of choice for ransomware actors, who pose a critical international security threat. The average total cost of recovery from a ransomware attack has doubled from 2020 to 2021, costing $1.85 million, with only 8 percent of organizations managing to get back all of their data after paying a ransom. By 2031, ransomware is anticipated to cost the global economy more than $265 billion. In September 2021, the U.S. Department of Treasury announced that it will impose sanctions to prevent hackers from using digital currencies in ransomware attacks. While the full list of targets of the sanctions have not been disclosed, it is likely that wallets and exchanges will be affected given that wallets are necessary to store encryption keys and access users’ holdings, and exchanges are the primary on- and off-ramps to the crypto ecosystem. Most recently, the Office of Foreign Assets Control (OFAC) imposed sanctions on Russia-based exchange Suex which the Treasury Department argues facilitated ranswomare payments.

Countries are also using cryptocurrency to evade sanctions and access the international financial system to procure U.S. dollars to fund and facilitate their policy goals. North Korea notoriously has turned to cryptocurrency in pursuit of its nuclear weapons program, with a UN report estimating that the country has stolen $2 billion in cryptocurrency and is targeting cryptocurrency exchanges for cyber theft as it can “more readily” use these proceeds abroad. Iran also uses cryptocurrency mining to circumvent trade embargoes and earn hundreds of millions of dollars in cryptocurrency assets that can be used to bypass sanctions. In 2019, Iran established a licensing regime that requires miners to identify themselves, pay a higher, but still relatively low, tariff for electricity, and sell their mined bitcoins to Iran’s central bank. Iran’s vast oil supply makes power cheap in the country. As a result, it has attracted investment from Chinese mining equipment manufacturers and Chinese miners. These miners are concentrated in a Special Economic Zone (SEZ) in southeast Iran, where cheaper electricity is reportedly sold to them. According to the Iranian Ministry of Industries, most mining farms in Iran operate unofficially and generate $660 million per year. As of July 2021, there are reports that the Iranian parliament will propose a bill entitled “Supporting Cryptocurrency Mining and Regulation of Domestic Cryptocurrency Trade,” which would ban all cryptocurrency payments other than those in the country’s national cryptocurrency. (Iran has temporarily banned mining due to local electricity shortages caused by mining operations.) The graphic below highlights the costs of illicit activities related to cryptocurrency.

According to CipherTrace’s Annual Cryptocurrency and Anti-Money Laundering Report, in 2020, fraud vastly exceeded hacks and thefts, making up 73 percent of all cryptocurrency-related crimes in 2020. The following graphic shows the share of illicit funds going to the top five illicit fund receiving services by crime.

Note: Cryptocurrencies include Basic Attention Token, Bitcoin Cash, Bitcoin, Ethereum, Litecoin, Maker, OmiseGo, Paxos Standard, True USD, USD Coin, and Tether.

Source: Chainalysis 2021 Cryptocurrency Crime Report


Cryptocurrency Ransomware Payments (2013–2020)

Cryptocurrency is payment rail of choice for ransomware actors, and in 2020, victims paid more than $400 million in ransom—a 337 percent increase from 2019. In the first half of 2021, $81.6 million worth of cryptocurrency ransom payments were made.

Note: Currencies used to pay ransom include Bitcoin Cash, Bitcoin, Ethereum, and Tether.

Source: Chainalysis via Statista

While difficult, it is not impossible to trace back transactions, as seen with the Colonial Pipeline ransomware attack, where $2.3 million in Bitcoin was recovered from the initial $4.4 million ransom demand. Cryptocurrency’s reliance on blockchain technology can potentially allow governments to monitor the flow of cryptocurrency transactions and track financial activity. By working with intergovernmental forums such as the FATF, governments create a regulatory framework that ensures that sanctioned actors cannot easily transfer and use cryptocurrency without oversight. Experts have notably pointed to Canada, Singapore, and Japan as examples of strong AML/CFT regulations for cryptocurrency businesses aligned with FATF guidance. 

Greater attention also must be paid to other types of digital assets, specifically “Anonymity-Enhanced Cryptocurrencies,” also known as “privacy coins,” such as Monero and Zcash. Compared to native cryptocurrencies, privacy coins ensure the privacy and anonymity (not the pseudonymity) of their users. Due to the private nature of these coins, data regarding their use and circulation is limited. However, there has gradually been increased pressure to regulate them. In some cases, exchanges such as LiteBit have delisted privacy coins, in part because regulators in the Netherlands have stated that they were “too high a risk.” Other exchanges in Australia, South Korea, Japan, and the United States are similarly delisting privacy coins such as Monero, Zcash, and Dash amid regulatory and banking pressures that view them as conflicting with AML and Know Your Customer (KYC) rules. In some countries, such as France, authorities are recommending total bans on privacy coins. Privacy coins present a real concern, and delisting them from exchanges does not limit their use and accessibility. However, Bitcoin remains the dominant cryptocurrency for criminal activities. Since 2013, the FBI has noted the “enormous growth” in the number of cases involving digital currency payments, with 75 percent of all cryptocurrency-based illegal activities involving Bitcoin. Continued regulation of both native cryptocurrencies and privacy coins is necessary to mitigate their uses in illicit activities.

Scams, Pump-and-Dump Schemes, and Market Manipulation Pose Risks to Investors

In the last two years, massive exit scams have dominated crypto-related crimes. In 2019, a Ponzi scheme on PlusToken, a cryptocurrency wallet, totaled $2.9 billion, and in 2020 a similar scheme defrauded investors at WoToken, a dApp cryptocurrency wallet project, out of $1.1 billion. In 2020, DeFi protocols particularly suffered from hacks and scams, with nearly 99 percent of major fraud volume in the second half of 2020 coming from DeFi protocols. 

It is estimated that approximately 1,000 entities own about 40 percent of the entire Bitcoin market, thereby allowing them to have a tremendous effect on the crypto economy and have the potential to manipulate currency valuations through single trades. Referred to as “whales,” they include investment groups such as Pantera Capital, Fortress Investment Group, and Falcon Global Capital. Due to the relatively smaller size and greater volatility of the cryptocurrency market, compared to the traditional financial market, whales have an outsized impact on prices and can potentially harm smaller investors. A whale in one cryptocurrency can also adversely impact other altcoins, because they are heavily indexed on exchanges. This phenomenon was observed in February 2021 when a massive sell-off of Ether caused the coin to fall from $1,628.82 to $700 (a price drop of more than 50 percent) in the span of three minutes, and over 24 hours, the global cryptocurrency market tumbled by 14 percent, which the cryptocurrency exchange Kraken posited was due to the activities of a whale. 

Unlike the stock market, pump-and-dump schemes in the cryptocurrency world—which involve bad actors spreading false or misleading information to create a buying frenzy that will “pump” up the price of an asset and then “dump” the asset by selling at the inflated price— can also last minutes instead of months, and encryption techniques allow the perpetrators to hide their identity. In the first 70 seconds of a typical crypto pump-and-dump scheme, prices increase by 25 percent on average, and trading volume increases 148 times. In some cases, organizations are created specifically to manipulate the market. A Russian-based organization called Gotbit, for example, inflates trading volumes on obscure cryptocurrency exchanges for a fee and has about 30 cryptocurrency projects as clients.  

Scams also present a concern. The Federal Trade Commission (FTC) warned that since October 2020, approximately 7,000 consumers have lost more than $80 million in cryptocurrency scams, increasing “more than ten-fold, year-over-year,” with consumers losing around $1,900 on average. ICOs, where start-ups can crowdsource funding to kick-start their cryptocurrency businesses, have been the sources of multiple instances of manipulation. For example, in May 2021, consumers lost over $2 million in cryptocurrency to scammers impersonating Elon Musk. Moderators struggled to rein in the activity on Twitter, and such deceptive tactics remain prevalent on the platform. Digital asset exchanges work independently without being governed by a common forum, resulting in a highly fragmented market. In the absence of a common forum, it is difficult to detect malicious activity, and very taxing to conduct cross-market surveillance. 

In the last two years, massive exit scams have dominated crypto-related crimes. In 2019, a Ponzi scheme on PlusToken, a cryptocurrency wallet, totaled $2.9 billion, and in 2020 a similar scheme defrauded investors at WoToken, a dApp cryptocurrency wallet project, out of $1.1 billion. In 2020, DeFi protocols particularly suffered from hacks and scams, with nearly 99 percent of major fraud volume in the second half of 2020 coming from DeFi protocols. 

Globally, regulations concerning investor protections are scarce. Countries such as Bulgaria, Ghana, Guatemala, Honduras, Hungry, Kenya, Kuwait, and Poland, among others, have no cryptocurrency legislation and only warn investors and consumers about the risks regarding the industry and its volatility. Coupled with the unique characteristics of new assets and frequent changes to market structures, inconsistent regulatory guidance makes the cryptocurrency industry highly susceptible to abusive practices, thus impacting investors and markets. Moreover, the lack of guardrails to protect investors, particularly smaller ones, allows market manipulators and other bad actors to operate with impunity.

Cybersecurity Challenges Present Risks to the Growing Crypto Sector

One of the biggest challenges for cryptocurrency is uncertainty regarding cybersecurity and the integrity of transactions. Stakeholders are increasingly concerned about the authentication, authorization, and confidentiality limitations of cryptocurrency transactions as they evaluate engaging in this new sector. Although moving transactions on a blockchain is generally reliable and secure, there are several vulnerabilities that can affect a cryptocurrency’s network. From mining pools to wallets to smart contracts to specific mechanisms within the protocol that verify transactions, each component has its own unique set of vulnerabilities that can cause double spending (where a user could make a company of a coin or token then send it to another party while holding onto the original, as an example) or force a platform to upgrade to a system that is favorable to hackers, distributed denial of service (DDoS) attacks, or the theft of encryption keys. In August 2020, for example, Ethereum Classic suffered a 51 percent attack that resulted in $5.6 million worth of the currency being double spent. 

Another significant vulnerability withing the ecosystem is data quality. One of the main arguments made by proponents of blockchain technology and cryptocurrency is that data cannot be revised once it has been recorded in the blockchain. Platforms can only take responsibility for the quality and accuracy of information once it has been input, meaning that the data being pulled from organizations and individuals must be trustworthy. A corrupted oracle—a scalable relational database architecture that manages and processes data across wide and local area networks—could cause a domino effect across the entire network, particularly if blockchain oracles are centralized. (This is known as the “Oracle Problem.”)

As the DeFi sector continues to grow with the support of institutional investments, so too do the number and variety of cyberattacks. Most recently, in August 2021, the Poly Network—a DeFi provider that allows users to transfer tokens tied to one blockchain to another network—suffered a cyberattack where $600 million was stolen by hackers who exploited a vulnerability in its system. The attack is considered the “biggest [hack] in the decentralized finance history.” Given that the hacked systems operate differently, reports indicate that the companies have struggled to work together to address the fallout of the attack. Losses stemming from hacks, fraud, and thefts in the DeFi sector totaled around $474 million from January to July 2021. Most attacks have been conducted by outside agents, though 24 percent have been inside jobs.

Graphic 8

Cryptocurrency Hacking

According to CipherTrace, the average value taken by cryptocurrency criminal actors in 2019 was 160 percent higher than in 2020, suggesting that the crypto space’s cyber defenses are improving. Overall, from 2018 through 2020, cryptocurrency hacking totaled $2.97 billion.

Source: Chainalysis’s 2021 Cryptocurrency Crime Report

In 2014, the Cryptocurrency Security Standard (CCSS) was introduced to provide guidance on the secure management of cryptocurrency. It is managed by the CCSS Steering Committee, which is composed of the main stakeholders of the cryptocurrency ecosystem. Currently, the committee includes companies such as BitGo, Deloitte, PwC, Ciphrex, C4, and ShapeShift, among others. The CCSS is designed to complement existing industry standards, primarily the Payment Card Industry Data Security Standard (PCI DSS), which is used by major payment brands such as American Express, Discover Financial Services, JCB International, MasterCard, and Visa. However, given the decentralized nature of the cryptocurrency industry, as well as the networks themselves, it is difficult to standardize security across the entire ecosystem, compared to a centralized network that is managed and overseen by a single entity. In addition, the CCSS is limited to the secure management of wallets, unlike the PCI DSS standard, which is applied to an entire transaction flow (e.g., from the technology used to acquire transactions, to how information on the transaction is treated, to the management of all subsequent processing steps). As a result, additional security standards are necessary to secure all components functioning in the cryptocurrency environment.

Environmental Impact of Cryptocurrency Mining

Another major challenge confronting cryptocurrency is its environmental impact. With the world’s attention on tackling climate change and reducing emissions by 2050,  the environmental impact of cryptocurrency mining has come under increasing scrutiny. Bitcoin, for example, consumes an estimated 97.68 terawatt-hours per year, according to the Cambridge Centre for Alternative Finance. The graphic below shows Bitcoin’s electricity consumption over time.

In addition to mining, moving money—whether through cash, credit cards, or cryptocurrency—consumes energy and generates some environmental cost. Bitcoin, Ethereum, and Ripple notably uses more energy per transaction than Visa and Mastercard. Below, the graphics showcase how much energy is consumed for Bitcoin mining and the energy used to facilitate transactions among Bitcoin, Ethereum, and Ripple.

Bitcoin electricity consumption varies, depending on demand, but peaked to an all-time high in May 2021. After China’s crackdown, miners have looked to the United States— particularly New York and Texas—to relocate their operations. In May 2021, the Chinese company Bit Mining announced that it would invest $25 million to build a 57.2-megawatt mining facility in Texas, reportedly powered by 85 percent low-carbon energy. In response to the influx of mining interest, some lawmakers have introduced legislation that would prohibit mining in New York, while others in Texas are welcoming the mining activities.

Note: The total yearly electricity consumption (expressed in terawatt-hours/TWh) is an annualized measure that corresponds to the total amount of electricity used over one year, assuming continuous power at the current rate. A seven-day moving average is applied.

Source: Cambridge Centre for Alternative Finance

Average Annual Energy Demand of All Cryptocurrency Transactions
(2020 - 2021)

Note: Country comparisons are calculated based on annual energy use from 2020 to 2021. Annual energy use per country is from the U.S. Energy Information Administration (EIA) as of 2019 and the average annual energy demand of cryptocurrency transactions is from XRP Carbon Calculator as of 2021. Share of energy used by cryptocurrency relative to a country’s energy use is calculated based on the average annual energy consumption for transactions per coin.

Source: Bitinfo Charts, U.S. Energy Information Agency, XRP Carbon Calculator, and Ycharts.

Absent effective government regulation, the industry is taking the lead in addressing the growing concerns regarding the environmental impact of cryptocurrency mining. Some networks have adopted a proof of stake consensus mechanism, which uses less energy than the traditional proof of work method. Technical changes such as these may demand less computational power from the networks and reduce energy use. Cryptocurrency mining equipment manufacturers have also noted that innovations in the mining rigs themselves and the systems used to maintain them can help reduce energy consumption. For example, immersion cooling systems, which are often used in data centers, are being used on rigs to reduce the cost of cooling. According to some estimates, they can reduce cooling costs by as much as 90 percent and increase power efficiency by 25 percent. Indeed, the industry’s motivations for improved cooling systems are largely about reducing operational costs rather than environmental ones, but such technological developments can also support goals to reduce overall energy consumption. 

In addition to technical changes, the industry and the United Nations launched the Crypto Climate Accord (inspired by the Paris Climate Accord) in April 2021. Currently, the Accord includes more than 150 companies and individuals spanning the cryptocurrency, finance, technology, energy, and NGO sectors, with a collective goal of achieving net-zero emissions from the electricity consumption associated with their respective crypto-related operations by 2030. As renewable options also grow more efficient and viable for mining, industry leaders contend that cryptocurrency can serve as an incentive for miners to build out new renewable technologies. Commenters also note that the current level of mining is unlikely to continue to expand. Bitcoin protocols subsidize mining, but those subsidies have a built-in check on their growth, known as “halving,” which cuts the revenue that miners receive in half every four years to account for inflation. Unless the price for Bitcoin doubles every four years in perpetuity (which is impossible for any currency), the share of miner revenue will eventually be zero, and miners will not be incentivized to continue mining.

While mining consumes vast amounts of electricity, conducting transactions also comes at an environmental cost. Bitcoin’s annual energy consumption for transactions is more than three times Ireland’s annual energy use, almost twice that of Singapore’s, and over one-third of Australia’s. As NFTs also grow in popularity, it is likely that Ethereum’s carbon footprint will also grow, given that many NFTs and marketplaces operate on Ethereum’s network.

Looking Ahead

When Bitcoin was first introduced in 2008, few would have predicted that it and the digital assets borne out of the ecosystem would grow into a $2 trillion industry. Regulators must now work with the industry to ensure that cryptocurrency is regulated appropriately, but it remains to be seen what approach they will take. 

In 2018, for example, the European Commission notably ratified the European Union’s 5th Anti-Money Laundering Directive (AMLD5), which seeks to tackle illicit uses of finance, and required EU countries to update their regulations regarding the crypto sector by January 10, 2020. However, central banks and finance ministries have faced implementation hurdles. Thirty percent of member states still have not fully implemented the directive, with one country having no measures started so far, and seven others only partially implementing the directive. Implementation of the directive has also varied among countries, and small cryptocurrency exchanges have been forced to shut down due to the high compliance costs of the AMLD5 regulation, for which the Dutch National Bank (DNB) estimates that registration alone costs $36,500 per entity, in addition to rolling compliance needs. 

In September 2020, the EU Commission published the Markets in Crypto-Assets Regulation (MiCA) as part of its Digital Finance Package and seeks to regulate all issuers and service providers dealing with crypto assets. However, it is currently unclear how MiCA will translate to practical legislation for different players, given the breadth of the crypto ecosystem and the various legal statuses that cryptocurrencies hold. Indeed, due to the uncertainty concerning regulations, to prepare for potentially higher compliance costs amid increased scrutiny from governments and to prepare for trading fluctuations, some cryptocurrency players have created cash reserves. For example, Coinbase, the second largest exchange by trading volume and first crypto start-up to be listed on a U.S. stock exchange as of April 2021, has accumulated $4 billion in cash because of the current regulatory environment.

Although countries are largely taking a jurisdictional approach when it comes to regulating cryptocurrencies, international efforts are underway to standardize regulation, with the FATF issuing guidance on AML/CFT standards, and the industry mobilizing stakeholders to address key concerns plaguing the sector, through initiatives such as the Crypto Mining Accord. However, more work must be done, especially as more countries, private-sector companies, and individuals enter the crypto game and technological innovations drive the industry’s growth. The central challenge for regulators will be balancing innovation with the necessary guardrails to protect the financial system while still harnessing the benefits that cryptocurrency can bring to their respective economies.

While creating opportunity, the technological forces brought forth by cryptocurrency and blockchain technology are posing new threats to the current financial system. The rise of stablecoins and private sector-developed coins, such as Facebook’s Diem and JP Morgan’s JPM Coin, has adapted the power and infrastructure of native cryptocurrencies and applied it to the framework of the traditional fiat monetary system. Given that such coins are often pegged to a fiat currency, widespread adoption poses significant challenges to monetary sovereignty, potentially undermines ongoing CBDC initiatives, and poses new regulatory hurdles—all of which are putting governments on alert as these forces continue to destabilize the very foundation of the international monetary system. In Part III of FP Analytics’, The Future of Money Power Map series, we will continue to explore and analyze the roles of decentralized currencies, specifically the emergence of stablecoins and the private-sector actors that are challenging governments’ CBDC ambitions, and how they are using the emerging technologies introduced by cryptocurrency to redefine the future of money.

We Want to Hear from You

What are some of the biggest challenges to global cryptocurrency adoption and how can they be addressed?


Written by Helen You. Edited by Allison Carlson. Copyedited by David Johnstone. Art direction and design by Sara Stewart. Development by Andy Baughman and Wes Piper. Creative direction by Lori Kelley. Illustration by Doug Chayka for Foreign Policy.

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