22 Nov 2021

Coining Crypto

Global Insights
Cryptocurrencies continue to attract their share of doubters even as evidence mounts that -- in some form or other – they are here to stay. A new report from Citi Research’s Peter Christiansen takes an in-depth look at looming regulation, risks and potential opportunities.

The subject of cryptocurrencies can split opinion. Naysayers are seldom far away. 

Questions tend to be some combination of the following:  

Are they a stable store of value?

Are they scalable as current electronic payment/value transfer systems?

Do they offer stable supply and price transparency?

Do they have industrial uses?

Can they provide cash flows?

Could they potentially disrupt existing monetary systems?

What are the issues relating to their non-renewable energy consumption?

Despite much skepticism, usage among participants, developers, and facilitators is evolving at an accelerating rate. The form of the so-called crypto-economy will likely remain a matter for debate for some time.

Distributed ledger or blockchain technology continues to expand at a rapid pace, offering new efficiencies across many areas within financial services. More specifically:

  • Institutional Finance / Money Transfer: Notwithstanding an uneven global regulatory cycle over the coming months/years, we see the adoption of cryptocurrencies potentially impacting the world of (i) institutional finance, bolstered by algorithmic stablecoins, DeFi Apps, and smart contracts, as well as (ii) cross-border money transfers/remittances, given potential cost and speed efficiencies.
  • Payments:  Unlike fiat, cryptocurrencies are highly volatile, while the asset class is treated as a taxable (capital gains), intangible asset in most regions.
  • Digital Assets / Loyalty: Citi analysts reckon cryptocurrencies have the opportunity to harmonize non-crypto digital assets, such as gaming assets, airline miles (just as an example), and other non-cash merchant rewards/credits. Perhaps such a shift, either direct or via a conversion facilitator, can improve consumer transparency, usage, and ubiquity between spending rewards.
  • Intellectual Property / Authentication: By their nature, cryptocurrencies are both necessary by-products and rewards for creating and maintaining a provisioned/unprovisioned blockchain. Blockchain technology is more than a timestamping tool as it can facilitate, via smart contracts and/or non-fungible tokens (NFTs), (i) legal right enforcement, (ii) asset authentication, (iii) piracy prevention, (iv) version control, and (v) IP asset transfer. There is an increasing view among technologists that these features can be utilized to manage potential threats associated with synthetic media, sometimes referred to “Deep Fakes.”
  • Web 3.0: Originally called the “Semantic Web” by World Wide Web inventor Tim Berners-Lee. The aim of Web 3.0 is to be a more autonomous, intelligent, and open internet… an interconnected web in a decentralized way (Web 2.0 relies on centralized repositories).

Internet vs. Crypto Adoption Curve

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Source: World Bank,


The global regulatory and geopolitical environment for crypto assets is uneven, sometimes ambiguous, and will likely remain a moving target for some time. Policy shifts are likely forthcoming in the not-so-distant future and will likely have consequences for all participants as they relate to (i) tax rates and reporting standards, (ii) AML/KYC and surveillance compliance burdens, (iii) potential limitations and/or bans of certain products and services, (iv) potential regional bans, (v) legal and disclosure frameworks, (vi) user privacy, and (vii) security frameworks. Below we highlight recent regulatory/geopolitical developments and focus issues impacting the cryptocurrency landscape:  

  • China Bans Crypto: Trading cryptocurrency was officially banned in China in 2019, but had continued online through foreign exchanges. Last May, three state-backed organizations, including the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China, warned banks and payment companies against providing crypto-related services. In the aftermath of the decree, Bitcoin declined ~10%, while Ether declined ~22%. The following month, the consortium decreed banks/payments firms to stop facilitating crypto transactions and issued a ban on crypto mining. Subsequently, The People’s Bank of China declared “virtual currency-related business activities” as illegal.  
  • El Salvador Accepts Bitcoin as Legal Tender:  Last July, El Salvador added Bitcoin as accepted tender for remittances (~20% of GDP) and deemed Bitcoin as legal tender for goods and services in September.  Subsequently, the government’s 2035 bonds have declined ~16% since adoption, while CDS pricing has more than doubled.  Brazil is also considering a cryptocurrency regulation bill that would also would deem Bitcoin as legal tender for goods and services.
  • Government Data Collection: Under recommendations from the Financial Crimes Enforcement Network (FinCEN), and the Financial Action Task Force (FATF), the U.S. and several foreign jurisdictions are likely to impose the “Funds Travel/Transfer Rule” on crypto facilitators.
  • Stablecoin Uncertainty: The regulatory treatment of fiat-backed stablecoins is highly uncertain and has drawn significant attention from legislative and regulatory bodies globally. The issuance and resale of stablecoins may affect a variety of banking, deposit, money transmission, prepaid access and stored value, anti-money laundering, commodities, securities, sanctions, and other laws and regulations in the U.S. and in other jurisdictions.
  • DeFi Uncertainty: There is considerable regulatory uncertainty regarding the status of staking, lending, and other yield-generating activities under the U.S. federal securities laws.

Investors keen to deepen their understanding of the space could refer to recent publications from Citi Global Insights, including How Socially Inclusive is Crypto? and El Salvador’s Bitcoin Bet. And for more information on this subject, please see this Research report, published on October 26, 2021.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.


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