Cryptocurrencies have been associated with speculative trades and criminal activity, but now form part of the portfolio of mainstream investors. It was one of the hottest topics at the IMF summit – will regulation confirm the trend, following Donald Trump’s election win?
In a three-day period in October BlackRock, the world’s biggest asset management firm, invested $1bn in bitcoin, through its ETF (exchange traded fund). The pre-eminent cryptocurrency has moved from the fringes of economic activity to the mainstream within just a few years. Robbie Mitchnik, head of crypto at BlackRock, described bitcoin as a ‘risk-off’ asset.
Bitcoin ETFs are now an established asset class, as respectable as stocks or government bonds. BlackRock’s iShares Bitcoin Trust has attracted around $1.9bn of inflows and the Fidelity Wise Origin Bitcoin Fund about $1.6bn. Spot bitcoin ETFs have attracted around $22bn of inflows.
And perhaps the biggest boost to the rise of cryptocurrencies came in early November with the election of Donald Trump as presidency and the Republican party gaining control of the Senate. Trump has championed bitcoin, proposed a Federal Bitcoin Reserve, and encouraged more bitcoin mining in the US. Most significantly of all, potentially, he has promised to replace Gary Gensler, head of the Securities and Exchange Commission. Gensler has issued lawsuits against crypto projects for allegedly breaking securities laws, part of a policy which crypto enthusiasts claim is holding back innovation. Gensler and other crypto sceptics argue that they are protecting individual investors, not holding back progress, and the collapse of FTX and Terra Luna in 2022 serve as warnings. More scandals may follow deregulation and cool the enthusiasm, but for the time being the trend is heading in one direction.
At the IMF summit in Washington, DC, at around the same time as BlackRock’s $1bn investment, some of the best attended sessions were those on cryptocurrencies and digital currencies. The rooms were full, with many standing at the back. Much of the discussion was about regulation, as one would expect among an audience that included many central bankers and administrators. Regulation, however, does not necessarily mean clamping down on activity, but rather ensuring that there are guardrails, and greater transparency. It is too early to assess the impact of a change in leadership at the SEC.
More confirmation of crypto assets as a legitimate part of mainstream institutional investment came with the news that the endowment of Emory University, based in Atlanta Georgia, has confirmed ownership of $15mn-worth of shares of the Grayscale Bitcoin Mini Trust. Similarly, some pension funds have invested in bitcoin ETFs. The Municipal Pension Plan of Jersey City, New Jersey, has allocated 2% of its assets into bitcoin ETFs.
Cryptocurrencies are based on blockchain technology, which enables an unalterable digital confirmation of transactions – the transaction is the receipt. This has many applications. So while some cryptocurrencies have been associated with speculative trades, or use by criminal and terrorist gangs, the technology itself is ethically neutral. Blockchain is increasingly used to ensure that farmers who are part of a fairtrade network receive the funds that they are due, for example.
In a parallel development, digital currencies are commonly used by low-income unbanked individuals to trade and make purchases through their mobile phone.
Tokenisation is another development that is likely to grow as a trend. This is a proof of ownership of a real world asset, such as real estate, in the form of a token or tokens on a blockchain. This can facilitate multiple ownership of an asset, and trading of the tokenised assets. In July the Middle East-focused blockchain platform Mantra announced that it would tokenise $500mn-worth of real estate assets of Dubai-based MAG Group. Investors will earn yield through stablecoins and Mantra’s OM token.
The Bank for International Settlements has called tokenisation a ‘paradigm shift’, that is set to create new financial instruments and new business models.
The price of bitcoin has topped $76,000, up from around $42,000 at the start of 2024. The price of gold has risen in tandem with the appreciation of bitcoin, topping $2,700 per ounce. Gold is often seen as a safe haven asset during times of political and economic turbulence.
An additional underlying factor behind these asset price rises is faltering confidence in the US dollar. It is the primary global reserve currency but its value is affected by the very high US public debt, which shows little sign of falling following the presidential election.
The IMF has published a Central Bank Digital currency (CBDC) Virtual Handbook, as a reference guide for policymakers and specialists at central banks and ministries of finance. The aim is to collect and share knowledge and best practice ideas. In June, Qatar Central Bank announced that the pilot project of its digital currency would involve both the central bank and local banks participating in trials involving high-value wholesale payments.
It is likely, perhaps inevitable, that digital currencies will become an integrated part of the financial ecosystem. The speed and convenience of digital world extends to money, but as ever with new technology, there are risks as well as advantages, and a corresponding need for a regulatory response.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
Fahad Badar
