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2019 is crunch time for cryptos: here to stay or past their heyday?

The next twelve months are likely to be a crunch time in many respects. Brexit looms large over the UK, global macro-economic trends point towards an imminent recession, the President of the US has a Democrat House of Representatives to contend with and in the world of Fintech, blockchain technology is set to experience a year of reckoning.

December 2018

After first grabbing the headlines back in 2011 with the advent of Bitcoin, blockchain and crypto assets have progressed significantly, with over 1500 crypto currencies now vying for attention alongside the development of a number of other cryptoasset types. But as the market and technology has grown, so too has the volume of criticism and the strength of opposition. Payment specialists decry the slow processing times and high transaction costs associated with crypto currencies; law enforcement looks at ICOs as another way of scamming the public. And now the regulators are circling.

So what does 2019 have in store for blockchain and cryptoassets? Are we set to see them enter the mainstream once and for all, as regulation finally catches up with the technology? Or will this be the year that the world finally tires of the disruptive technology that has been unable to disrupt as much as it would like.

The empire strikes back

The summer of 2018 saw the publication of two landmark reports on crypto currencies in the UK: the Treasury Select Committee's Inquiry into Digital Currencies; and a report by the Cryptoassets Taskforce, which was a joint project between the Bank of England, the FCA and the Treasury. But rather than being an exultation of the benefits of the technology as many crypto-evangelists had hoped, they largely amounted to a withering indictment of blockchain's problems. Hitherto, the market was dominated by stories about the decentralised benefits and social utilities associated with crypto currencies (in particular), and the fact that central bank currency issuers were right to feel threatened. But this summer saw the empire strike back and flip the narrative on its head. Crypto-scepticism is now greater than ever before. Both the Taskforce report and the Treasury Select Committee's report ran coach and horse through a number of myths: crypto currencies were not timely at settling payments, they were not inexpensive and they were also not as safe as people had initially thought. Alongside this, data on the overwhelming failure rate of ICOs and their related projects has poured cold water on any burning crypto fires.

Fundamentals

In some ways, the reports published over the summer highlighted what needs to be solved in the world of blockchain before it can ever grow as a mainstream technology. Central to this is the issue of capacity. At its peak, Bitcoin's global capacity allows the processing of around 0.6 million transactions per day. By way of comparison, BACS and faster payments process more than 30 million payments per day, in the UK alone. The relatively limited capacity of Bitcoin means that for most users, settling transactions often takes hours. Furthermore, whenever Bitcoin reaches processing capacity, users are required to offer fees in order to secure a preferential place in the processing 'queue' – something that is expensive, not transparent, and capable of rankling even the most stoic of traders. While solutions to blockchain's capacity issues may exist, they arguably need to be implemented in 2019 if the technology is to remain relevant.

Alternatives

2019 may also see a rise in other technologies that directly challenge blockchain and which are already capable of severely undermining any advantages that blockchain purports to bring. The biggest developments are the rise of the faster payments infrastructure and the growing innovations in the payment space driven by the Payments Systems Directive 2 and Open Banking. Banks and large financial institutions are already backing many innovative payment companies and a 'killer app' in this space has the potential to push blockchain into the background – something which would not unduly displease central banks. This means if ever there were a time for a 'killer app' to manifest itself in the blockchain space to shore up its image – that time is now.

Game over or… time for a new game?

So after a gloomy 2018, does 2019 spell the demise of blockchain? Perhaps in its current guise – as a permissionless database capable of complete decentralisation – but not entirely. A salient point that has emerged from the rather downbeat reports on blockchain is that the underlying technology – a decentralised database capable of automation through smart contracts – is actually a pretty good idea, and capable of adding value to processes in the corporate world. If, however, blockchain is adopted by investment banks to issue bonds, for example, we are very unlikely to see permissionless blockchains in their conventional form. Instead, it's more probable we will see 'permissioned' blockchains were access is restricted. While this is never going to satisfy a blockchain purist, for investors, the possibility of limiting the decentralisation so that a party has overall responsibility, is reassuring. If there is a fraud or theft in a permissioned system, there is a greater likelihood that one or a collection of parties would be found liable. In the world of Bitcoin and permissionless blockchains, this is almost impossible. So maybe in 2019, we will begin to see the development of blockchain mark 2.0.

The future for blockchain and cryptoassets may be uncertain but one thing is for sure – don't expect it to drop from newspaper headlines anytime soon.

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Arup Sen


Arup looks at whether there is a future for blockchain and cryptoassets.

"If ever there were a time for a 'killer app' to manifest itself in the blockchain space to shore up its image – that time is now."