Crypto firms say thousands of digital currencies will collapse

With more than 19,000 virtual currencies in existence, the cryptocurrency industry has likened the current state of the market to the early years of the internet. Industry players said however that most of these coins will collapse.

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Several cryptocurrency industry players have told CNBC that thousands of digital tokens are likely to collapse while the number of blockchains in existence will also fall over the coming years.

There are more than 19,000 cryptocurrencies in existence and dozens of blockchain platforms that exist. A blockchain platform, such as Ethereum, is the underlying technology that many of these different cryptocurrencies are built upon.

The recent collapse of so-called algorithmic stabelcoin terraUSD and its associated digital token luna, which sent shockwaves through the market, has thrust a spotlight on the thousands of cryptocurrencies in existence and whether they will all survive.

“One of the effects of what we’ve seen last week with the Terra issue is we’re at the stage where basically there are far too many blockchains out there, too many tokens. And that’s confusing users. And that’s also bringing some risks for the users,” Bertrand Perez, CEO of the Web3 Foundation, told CNBC at the World Economic Forum in Davos, Switzerland, last week.

“Like at the beginning of the internet, you were having lots of dotcom companies and lots of them were scams, and were not bringing any value and all that got cleared. And now we have very useful and legit companies.”

Brad Garlinghouse, CEO of cross-border blockchain payments company Ripple, said there is likely to be “scores” of cryptocurrencies that remain in the future.

“I think there’s a question about whether or not we need 19,000 new currencies today. In the fiat world, there’s maybe 180 currencies,” Garlinghouse said.

Guggenheim Chief Investment Officer Scott Minerd added further pessimism last week when he said that most crypto is “junk” but that bitcoin and ethereum would survive.

The comments from the industry come as the cryptocurrency market continues to feel pressure. Bitcoin is off more than 50% from its record high it hit in November, with many other digital tokens sharply lower from their all-time highs.

Many different blockchain platforms from Ethereum to Solana are vying for a leadership position in the industry. But Brett Harrison, CEO of cryptocurrency exchange FTX U.S., said the hundreds currently in existence will not all survive.

“When you think about the blockchains … there probably won’t be hundreds of different blockchains in 10 years, I think there’ll be a couple of clear winners for different kinds of applications,” Harrison said.

“And we’ll see the market … sort that out over time,” he added.

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UST debacle will ‘probably be the end’ of algorithmic stablecoins

Luna, the sister cryptocurrency of controversial stablecoin TerraUSD, dropped to $0. The collapse of the algorithmic stablecoin TerraUSD has raised question about the future survival of similar crypto assets.

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Algorithmic stablecoins like terraUSD, which collapsed and sent shockwaves through the cryptocurrency market, are unlikely to survive, the co-founder of digital currency tether told CNBC.

Stablecoins are a type of cryptocurrency that is usually pegged to a real-world asset. TerraUSD or UST, is an algorithmic stablecoin which was supposed to be pegged to the U.S. dollar.

Whereas stablecoins like tether and USD Coin are backed by real-world assets such as fiat currencies and government bonds in order to maintain their dollar peg, UST was governed by an algorithm.

UST lost its dollar peg and that also led to a sell-off for its sister token luna, which crashed to $0.

The debacle has led to warnings that algorithmic stablecoins might not have a future.

“It’s unfortunate that the money … was lost, however, it’s not a surprise. It’s an algorithmic-backed, stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar,” Reeve Collins, the co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland, last week.

“And a lot of people pulled out their money in the last few months, because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most algo stablecoins.”

Collins is also the co-founder of tether, which is not an algorithmic stablecoin. But tether’s issuer claims it is backed by cash, U.S. Treasurys and corporate bonds. In the crypto market turmoil last month, tether also briefly lost its dollar peg before regaining it.

Jeremy Allaire, CEO of Circle, one of the companies behind the issuance of the USDC stablecoin, said he thinks people will continue to work on algorithmic stablecoins.

“I’ve compared algorithmic stable coins to the Fountain of Youth or the Holy Grail. Others have referred to it as financial alchemy. And so there will continue to be financial alchemists who, who work on the magic potion to to create these things, and to find … the Holy Grail of a stable value, algorithmic digital currency. So I fully expect continued pursuit of that,” Allaire told CNBC last week.

“Now, what happens with regulation around it is a different question. Are there going to be, you know, clear lines drawn about what can interact with the market. What can interact with … the financial system, given the risks that are embedded,” he added.

Regulation ahead

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What is the current state of cryptocurrency regulation?

  • The total market cap of digital currencies is $1.7 trillion and over $90 billion worth is traded every day.
  • Analysts have warned that the industry is so large it could have macroeconomic consequences if mismanaged.
  • Piecemeal approaches to cryptocurrency regulation must be replaced by a globally coordinated framework.

Early in March, President Biden signed off on the long-awaited Executive Order on Ensuring Responsible Development of Digital Assets, a high-profile acknowledgement of the potential of the cryptocurrency industry.

That Executive Order commits the White House to taking part in research on cryptocurrencies and to engaging departments across the government to collaborate in the creation of a regulatory framework for digital assets. It also outlines a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”

According to the World Economic Forum’s Digital Currency Governance Consortium’s Steering Committee Member, Jeremy Alliare, “the Executive Order sets out initiatives to explore and engage in constructive problem solving around known risks that exist with the legacy financial system, and the new Web 3 world.”

This exploration, Allaire added, will cover “privacy, security, financial inclusion, global competitiveness for USD,” and more.

The White House is about to make a concerted effort to regulate the digital asset industry — given the size and growth of the industry, that push cannot come soon enough.

Today, there are 18,142 cryptocurrencies, 460 crypto-exchanges and the market cap of cryptocurrencies amounts to $1.7 trillion. Every 24 hours, $91 billion worth of cryptos are traded, most of them Bitcoin or Ethereum.

Given the size of the industry and the impending regulatory push, it is worth now taking stock of the current state of regulation. In doing so, it will become clear that a globally coordinated approach to regulation is necessary.

Cryptocurrency regulation is imperative

As the traditional financial system connects with the burgeoning crypto ecosystem, the growing interconnectivity raises concerns of spillover effects that could impact systemic stability.

For some time, cryptocurrency has been seen as a tool for diversification, but the tea leaves are starting to read differently. Earlier this year, the International Monetary Fund (IMF) released data indicating a correlation between bitcoin and the S&P 500. This raises fears of spillovers of investor sentiment between the stock market and cryptocurrencies.

Shortly following this analysis, the Financial Stability Board warned of implications for global financial stability if the current trajectory of growth in scale and interconnectedness of crypto-assets with these institutions continues. However, given the many data gaps that exist with regard to crypto-assets, a comprehensive macroeconomic impact assessment is still somewhat out of reach.

Moreover, the nature of the underlying technology for cryptocurrencies is such that it enables cross-border transactions without the need of any or existing financial intermediaries.

New applications and models such as tokenization, decentralized finance, NFTs (non-fungible tokens) and decentralized autonomous organizations challenge traditional models that outline who is currently considered a “person,” what is “value” and how this “value” can be transacted. This threatens to come into direct conflict with existing regulations pertaining to cross-border data flows, intellectual property rights and capital controls. It could also lead to ambiguity in the taxation environment, as well as posing a host of other policy concerns.

The potential implications of cryptocurrencies for global financial stability, and the distinctive nature of the underlying technology, evidence the importance of prioritizing regulatory discussions and decisions, both at a national and a global level.

The apparent relationship between Bitcoin prices and the US stock market could be cause for focus on cryptocurrency regulation.

The apparent relationship between Bitcoin prices and the US stock market could be cause for focus on cryptocurrency regulation.

Image: IMF

Current state of play in regulation

According to the World Economic Forum’s Global Future Council on Cryptocurrencies, there has been no internationally coordinated regulation of cryptocurrencies — though international bodies have been working on assessing risks and appropriate policy responses to the rise of cryptos.

Globally, central banks and regulators already have their eyes on this growing trend. Though they share a common objective — stabilizing their monetary systems and spurring innovation and economic growth — countries from China to El Salvador have already starting weighing up and implementing different regulatory options.

For those countries, their objectives appear to broadly align: protect the consumer, prevent illicit financing, protect the integrity of the market and promote innovation. Their approaches, however, vary.

While some jurisdictions, such as India, have amended existing laws, others, like Liechtenstein, have proposed bespoke models. Another approach, seemingly favoured by the European Union and UAE, proposes setting up entirely new regulators to deal with the industry in a comprehensive manner.

These territorial differences, while offering jurisdictional arbitrage opportunities, create uncertainties and increased compliance burden for businesses operating in the sector. This is exacerbated by the absence of common standards and terminologies.

For a truly global coordinated approach, countries and international organizations must work together, leveraging best practices and learnings from each other. As well as risk assessments and establishing common standards, there is also a pressing need to leverage the technology itself to develop fit for purpose and inclusive solutions, through public-private collaboration.

Blockchain is an early-stage technology that enables the decentralized and secure storage and transfer of information and value. Though the most well-known use case is cryptocurrencies such as bitcoin, which enable the electronic transfer of funds without banking networks, blockchain can be applied to a wider range of purposes. It has potential to be a powerful tool for tracking goods, data, documentation and transactions. The applications are seemingly limitless; it could cut out intermediaries, potentially reduce corruption, increase trust and empower users. In this way, blockchain could be relevant to numerous industries.

That said, blockchain also entails significant trade-offs with respect to efficiency and scalability, and numerous risks that are increasingly coming to the attention of policy-makers. These include the use of cryptocurrency in ransomware attacks, fraud and illicit activity, and the energy consumption and environmental footprint of some blockchain networks. Consumer protection is also an important and often overlooked issue, with cryptocurrency, so-called “stablecoins” and decentralized applications operating on blockchain technology posing risks to end-users of lost funds and also risks to broader financial stability depending on adoption levels.

Read more about the work we have launched on blockchain and distributed ledger technologies – to ensure the technology is deployed responsibly and for the benefit of all. We’re working on accelerating the most impactful blockchain use cases, ranging from making supply chains more inclusive to making governments more transparent, as well as supporting central banks in exploring digital currencies.

The way forward

The White House’s Executive Order is a noteworthy step in the right direction toward enabling cross-agency collaboration. A globally coordinated approach, encompassing international cooperation around regulation for crypto-assets, will be economically optimal, protect consumers and prevent abuse of cryptocurrencies for illicit activities.

The Forum’s Digital Currency Governance Consortium, composed of more than 80 organizations and representing diverse sectors and geographies, is working to this end. It has focused its second phase of work on examining the macroeconomic impacts of digital currencies and informing regulatory approaches for the same, as stakeholders continue to experiment with these instruments and the adoption of cryptocurrencies, stablecoins, and central bank-issued currencies.

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