Crypto’s Next Challenge Is Balancing TradFi Adoption Versus Regulatory Changes #CriptoNews

As the Presidential race enters the final stretch the crypto sector as a whole has experienced an uptick price levels, investor interest, and TradFi adoption. With bitcoin flirting with fresh all-time-highs – reflecting both optimism for bitcoin overall as well as continued inflows into spot ETF products – this uptick has spread to other areas of the crypto economy. Additionally even the maligned NFT space seems to be recovering, with Ubisoft launching (after several years of development) a blockchain based game (Champions Tactics) featuring NFTs valued between $7 and $63,000 per token. While web3 integration does not seem absolutely required to participate in the gaming experience, analysts anticipate most players engaging with these features for the full gaming experience. Gaming might not strike some veteran investors (crypto or otherwise) as a substantive industry nor clear market indicator the U.S. gaming market size for 2024 is estimated to be worth nearly $60 billion.

On top of these indicators TradFi institutions continue to integrate and adopt various aspects of blockchain and tokenization. The billion purchase of Bridge by Stripe, alongside the announcements from PayPal enabling merchant accounts to buy, sell, and hold crypto – including PYUSD – in wallets are recent examples illustrating how seriously payment processors are approaching crypto and stablecoin payments. Yet another recent illustration of this is the partnership announced by Visa and Coinbase, where customers will be able to move funds between Visa debit cards and Coinbase wallets. In addition eligible users can cash out funds from Coinbase to bank account, the latest sign of TradFi/banking integration within the crypto sector.

On the other hand the uncertainty regarding U.S. crypto policy continues exist, even as the likelihood of a new SEC chairperson and a pro-crypto Congress seem solidified. As the sector looks set to continue growing and integrating within established financial institutions and markets, there are several things industry advocates will need to balance as these conversations move forward.

Centralization Risks Stagnation

As crypto continues to integrate within the TradFi banking and financial system this has been seen as good news by the majority of investors, analysts, and crypto policy advocates. Such an approach is easy to understand; with spot bitcoin ETFs approaching nearly $30 billion in assets and inflows continuing the price of bitcoin and other crypto has been on an upward trend. Additionally, by looping in players such as PayPal, Stripe, and Visa the crypto industry receives a large dose of legitimacy especially among non-expert users, not to mention to increasing ease with which investors can access the marketplace.

One point that is worth highlighting is that this very centralization and integration can ultimately lead to stagnation if not carefully balanced with the innovative ethos that has powered crypto forward to date. Specifically every large financial institution, payment processor or asset manager has large (and other often global) businesses outside of crypto; these businesses will by necessity take priority over crypto if need be. Following this fact pattern it is reasonable to conclude that the very pathways that have powered crypto might also limit this upside moving forward.

Regulatory Overreach

A point that any crypto veteran is well versed in is the fact that U.S. regulators have not – to date – taken a pro-innovation approach with regards to cryptoassets. Tax treatment discourages usage as a medium of exchange, the SEC has waged a near constant campaign against the industry, and the lack of Treasury guidance continues to stifle further integration within TradFi institutions. That said, advocates and policymakers should be cautious about the enthusiasm with which a (most likely) pro-crypto Congress will embrace the mandate for writing and passing legislation. Imperfect legislation is virtually guaranteed, but the true risk for the industry lies down another path that remains undiscussed.

Regulations, and the entirely regulatory process, almost always tend to favor the incumbent institutions that possess the personnel, payroll, and lobbying mechanisms to help develop and curate policy discussions. Even with the crypto industry spending nearly $200 million on the current election cycle, punctuated by the pledge for $25 million from Coinbase, the sector remains very much a new player in these areas. Crypto native firms, and advocates looking to create a fertile landscape for future innovation, will need to balance the need of policymakers to “do something” with the need for forward looking policies.

Policy Timelines

Last but not least the reality is that governmental policy and legislation works on a timeline and cycle that is measured in years, something that the technology industry continues to find out via the multiple hearings and lawsuits that have besieged the sector since 2015. Crypto is an industry and economic area well known for moving fast, experimentation, innovation, and the dramatic rise in market capitalization and user base reflects the success of this approach. As the industry matures and continues to partner with TradFi institutions, and by necessity the regulatory apparatus, the acknowledgement that progress might take years will need to be accepted by leaders in the space. That said, this very ambiguity and inconsistent approach has not stopped the industry from growing rapidly and making inroads across the economy so perhaps this adjustment will continue to create an environment that crypto firms can operate within successfully.

Crypto continues to evolve and attract mainstream adoption, but investors and advocates alike need to actively monitor trends moving forward.