March 25, 2021
by Anya Thepot

According to its report released in March of 2021, Citi believes that Bitcoin is at a “tipping point” and could “become the currency of choice for international trade.”  The Citi GPS report states that not only has Bitcoin increased in usage and value, having hit $1 trillion in market capitalization in February 2021, but it has also “spawned a financial revolution” and “created a whole ecosystem around it.”  Citi predicts, “we could be at the start of a massive transformation of cryptocurrency into the mainstream.”

Although many banks initially shunned Bitcoin and argued that it had no intrinsic value, “the novelty of the blockchain technology underpinning the Bitcoin payment system network has been hailed as a breakthrough.” A growing and increasingly professionalized ecosystem of applications, crypto exchanges, crypto banks, and use cases are emerging to validate blockchain’s importance and validity. 

Growing acceptance by major companies and increasing availability at ATMs indicate that cryptocurrencies are gaining a mainstream presence.  For example, PayPal now accepts Bitcoin across merchant networks, a new Visa credit card allows users to earn Bitcoin rewards, Tesla has moved part of its corporate treasury into Bitcoin, and the American Cancer Society now accepts Bitcoin donations.  According to Coin ATM Radar, “Supported by the coronavirus-induced shift toward contactless payments, Bitcoin ATM installations increased by +85% in 2020 to 11,798 terminals, outpacing the previous years’ near +50% rise by a significant margin.”  Citi further cites statistics from CoinDesk in noting that the United States added over 800 Bitcoin ATMs in October 2020 alone and is the leading cryptocurrency adopter followed by Canada and Germany.

Citi’s report explains that public perception of what makes Bitcoin unique and valuable has evolved and morphed through three stages.  Bitcoin was originally technology-focused with its main emphasis on its technological potential and mechanics.  Recently, investors have focused on Bitcoin’s resistance to censorship and ability to protect purchasing power in uncertain times.  With the increasing use of Bitcoin as currency in global payments, Bitcoin’s engineered digital scarcity and its permanently finite supply have caused market participants to dub it “digital gold.”

Citi notes that Bitcoin’s most significant change is its shift from being “primarily a retail-focused endeavor to something that looks attractive for institutional investors.”  The firm attributes this change to “specific enhancements to exchanges, trading, data, and custody services” that are “increasing and being revamped to accommodate the requirements of institutional investors.”  Additionally, increased regulatory guidance has helped to guide both established and emerging firms toward integration of crypto-assets into the financial system.  One result of this shift is that many investors are looking to hold Bitcoin positions as a hedge given Covid-19-related fiscal and monetary policy impacts. 

Citi predicts that Bitcoin will soon enter a fourth stage of its evolution and infrastructure as an international trade currency.  Highlighting “the advantage of Bitcoin in global payments, including its decentralized design, lack of foreign exchange exposure, fast (and potentially cheaper) money movements, secure payment channels, and traceability,” the Citi GPS report states, “these attributes combined with Bitcoin’s global reach and neutrality could spur it to become the currency of choice for international trade.” 

Furthermore, based on the evolution of Bitcoin’s infrastructure and its utilization in a broader set of retail services, Citi notes “a growing view” that Bitcoin is evolving and “is becoming the de facto ‘North Star’ of the digital asset space, with its trajectory being seen as a compass for the evolution of the broader ecosystem.”

Despite its promise, Citi acknowledges that there are a host of risks that could slow or reverse Bitcoin’s progress.  “The entrance of institutional investors has sparked confidence in cryptocurrency, but there are still persistent issues that could limit widespread adoption,” Citi reports.  “For institutional investors, these include concerns over capital efficiency, insurance and custody, security, and ESG considerations from Bitcoin mining,” the bank adds.  “Security issues with cryptocurrency do occur, but when compared to traditional payments, it performs better.”  Bitcoin’s institutional investors and other proponents must address these concerns in a manner that continues to bolster confidence in cryptocurrency networks and “developments in the near term are likely to prove decisive.”

“[W]eighing these potential hurdles against the opportunities leads to the conclusion that Bitcoin is at a tipping point and we could be at the start of massive transformation of cryptocurrency into the mainstream.”  Citi concludes, “Bitcoin is at the tipping point of its existence and the path forward from here may have broad and widening repercussions.”

 

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.