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Sandy Kaul

Richard Webley

Jonathan Klein

Shobhit Maini

Omid Malekan

Ioana Niculcea

One thing we've learned while writing Citi GPS reports on disruptive innovations is the time it takes a new product to become widely used by global customers has decreased dramatically. According to Visual Capitalist, it took the telephone 50 years to reach 50 million customers, 22 years for television, seven years for the Internet and just 19 days for Pok&eacute;mon Go. So it's not a surprise the uptake of Bitcoin in the past almost 7 years has been nothing but extraordinary. Not only has Bitcoin increased in usage and value (hitting $1 trillion in market capitalization in February 2021), but it has created a whole ecosystem around it &mdash; including crypto exchanges, crypto banks, and new offerings into savings, lending, and borrowing. In the report attached, the authors note the biggest change with Bitcoin is the shift from it being primarily a retail-focused endeavor to something that looks attractive for institutional investors. In a search for yield and alternative assets, investors are drawn to Bitcoin's inflation hedging properties and it is recognized as a source of 'digital gold' due to its finite supply. Specific enhancements to exchanges, trading, data, and custody services are increasing and being revamped to accommodate the requirements of institutional investors. Bitcoin is also evolving as the 'North Star' in the digital asset space and is a compass for the evolution of a broader ecosystem of crypto commerce. New innovations, including the announcement of fiat-backed stablecoins, used within public and private networks, may build pressure for central banks to consider their own digital currency options. Where could Bitcoin be in another seven or so years? The report notes 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. These attributes combined with Bitcoin's global reach and neutrality could spur it to become the currency of choice for international trade. There are a host of risks and obstacles that stand in the way of Bitcoin progress. But weighing 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.Authors: Sandy Kaul,Richard Webley,Jonathan Klein,Shobhit Maini,Omid Malekan,Ioana Niculcea,

At the Tipping Point

The first Citi GPS venture into digital currency was back in 2014 when we featured it in an article in our second Disruptive Innovations report. Although we discussed Bitcoin, we did so with the caveat that it was a branded digital currency and a freely available generic Bitcoin technology but there was the potential that a non-Bitcoin alternative digital currency would one day supplant it. In May 2014, when we published the report, Bitcoin was just five years old with a market value around $6.2 billion.

Bitcoin At the Tipping Point 

Payment systems need to be modernized to meet the needs of 21st Century digital economies, but which road to follow?

Two Paths to Tomorrow's Money

Judy Zhang

Ronit Ghose

Yafei Tian

Kaiwan Master

Ronak S Shah

<h2>Crypto, CBDCs and 21st Century Cash</h2>
<h3>We live in a digital age. How we communicate, shop, entertain ourselves, take care of our health and order groceries, all look significantly different than how we would have done it just 20 years ago. Banking and finance is also changing. And so is money.</h3>
We already have digital money &ndash; trillions move every day, electronically. But are we on the cusp of Digital Money 2.0? Not the account-based electronic money that's been around for the past several decades, but a new type of token-based digital money. Tokenization, often via blockchain, is the basis of cryptocurrencies, stablecoins, and many proposed central bank digital currencies (CBDCs). While much attention has focused on Bitcoin in recent months, the ongoing experiments, pilots, and policy work around CBDCs could be equally if not more significant for the world of money. Central banks around the globe are warming up to CBDCs, triggered by Big Tech, and their ambitions to build alternative payment rails to existing card and bank-based payment systems with tokenized money, as in the case of the Facebook-backed Diem project. China is currently well ahead of major peers in developing a CBDC (which they call a Digital Currency Electronic Payment, or DCEP) and is already at the point of extensive pilot testing. Given the country's sprint to becoming a cashless society, we expect fast adoption of DCEP over the next five years relative to other CBDCs. Meanwhile, work on a digital Euro is now underway (we expect imminent announcements from the ECB) and U.S. policy makers are also now warming up to the idea of a Digital Dollar. While stablecoins such as Diem await regulatory approval, they could benefit from the huge network effects of their Big Tech sponsors. In fact, Diem could be an effective tokenized payment format inside the Facebook universe. It is possible other Big Techs could follow into tokenized money, but for now, few have declared this ambition publicly &mdash; and Facebook's user reach is extensive (3.3 billion monthly average users) and hard to replicate. Increased interest in cryptocurrencies like Bitcoin and Ethereum are also driving digital money. Market values have surged recently, with cryptocurrencies valued at an aggregate of approximately $2 trillion. While consumers have driven much of the adoption of crypto, the recent wave appears to be more broad-based versus 2017-18, with interest from both institutional investors and corporates as well as retail investors. Despite the popularity of crypto, it serves more as a (volatile) digital asset than a transaction currency in most parts of the world today. All transitions have intended and unintended implications. Tokenized money could disintermediate incumbent financial institutions, increase the volatility and cost of bank deposits, and substitute existing payment form factors such as checks and cards. New payment solutions could disrupt the already crowded payment space. But crypto trading and custody could be a new source of revenue for financial institutions and CBDCs could result in more efficient and targeted monetary and fiscal policy implementation. The race towards Digital Money 2.0 is on. Some have framed it as a new Space Race or Digital Currency Cold War. In our view, it doesn't have to be a zero sum game &mdash; there's a lot of room for the overall digital pie to grow.
<h2>Authors: Ronit Ghose, CFA,Judy Zhang,Kaiwan Master,Ronak S Shah,Yafei Tian, CFA,</h2>

The Future Of Money |Citi ICG

CBDCs, Crypto and 21st Century Cash

Hear from Monica Singer, South Africa Lead at blockchain tech company  ConsenSys, as she discusses her journey from centralized to decentralized finance and the growing demand for cryptocurrency solutions for the people of South Africa. Monica was a key contributor to the recent Citi GPS report The Future of Money. A summary and full link to the report is below. 

Future of Money

Citi Ventures Team

Citi Global Insights

Cryptocurrency is a global phenomenon. As cryptocurrency mining and use have grown, so has the impact on energy consumption around the world.
<ul style="list-style-type: square;">
<li>The energy consumption of Bitcoin has surged ~66x since late 2015 (see Figure 1) and now exceeds the total energy use of several medium-sized economies, according to Citi&rsquo;s commodities strategist Aakash Doshi.</li>
<li>As of mid-April 2021, the Cambridge University Center for Alternative Finance estimates that global power demand from the Bitcoin network reached an annualized 143-TWh, ~4% higher than Argentina&rsquo;s total electricity generation in 2019.</li>
<li>Aakash notes that CO2 emissions from the Bitcoin network could, however, be 60% higher than that of Argentina&rsquo;s electricity sector in 2019, given that more than half of Bitcoin&rsquo;s electricity demand is sourced from coal (see Figure 2).</li>
</ul>
&nbsp;
To help to get a better picture of global crypto activity and impact, Aakash suggests that the geographical distribution of Bitcoin &ldquo;hashrates&rdquo; &ndash; the measuring unit of the processing power of the Bitcoin network &ndash; can serve as a proxy for regional mining activity. According to Aakash, however, this approach has drawbacks given that power efficiency and cooling needs vary. In his report, Aakash uses the geographical distribution of global Bitcoin hashrate provided by Cambridge University to calculate country-level energy consumption from Bitcoin mining. He notes that the approach could be an oversimplification, as it assumes that every Bitcoin hashrate computation consumes the same amount of electricity. In actuality, each varies depending on factors such as the mining machine and location. For example, miners located in cooler regions might require less energy for cooling. For this reason, Aakash notes that &ldquo;deeper investigation into the local mining industry could provide a more holistic picture.&rdquo;
Nonetheless, we highlight these key takeaways from Aakash&rsquo;s report (see Figure 3):
<ul style="list-style-type: square;">
<li>In late 2019, over 75% of Bitcoin hashrate was located in China, and the US was ranked third.</li>
<li>Since then, digital mining activity has been shifting away from China, primarily to the US, Russia, Kazakhstan, and Iran.</li>
<li>China still accounts for the majority of global hashrate, hosting ~65% as of April 2020.</li>
<li>The US has moved to a second-place global hashrate ranking, overtaking Russia in 1Q&rsquo;20, with over 7% share by April 2020.</li>
</ul>
&nbsp;
As a result its "intense" energy consumption, the industry could face greater scrutiny, especially if the US continues to scale its crypto footprint and market-leader China cracks down on mining if it adversely impacts its climate goals. Potential offshoots of such scrutiny include taxation and regulatory oversight as well as measures to ensure that the industry shoulders its fair share of the environmental costs of its energy consumption. As Aakash notes, even some prominent Bitcoin proponents have acknowledged that the sector needs to do more to be energy efficient and offset emissions. However, Aakash also counters that &ldquo;an area to explore and an oft-ignored counterargument is whether crypto mining and validation could itself prove to be a use case that allows for faster payback on renewable projects by utilizing otherwise curtailed capacity, thereby reducing the need for government subsidies.&rdquo;
Whatever the outcome, it is clear that cryptocurrency consumes a lot of energy &ndash; not only in the minds of many investors globally but also in actual energy consumption and its impact on the environment.
&nbsp;
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Figure 1. Bitcoin Energy Consumption Has Grown Dramatically Since 2015 (Annualized)
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Figure 2. Coal Is the Power Source of Electricity Most Consumed by Bitcoin
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<img src="https://icg.citi.com/rcs/v1/media/icgPublic/akpublic/storage/retrieveMediaFile/6086d161853f3a4c3c625dd1" alt="Title: SideBySide - Description: Image|JSON##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##" width="329" height="245" />
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<img src="https://icg.citi.com/rcs/v1/media/icgPublic/akpublic/storage/retrieveMediaFile/6086d161f43edf1f6c54e1c8" alt="Title: SideBySide - Description: Image|JSON##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##" width="329" height="245" />
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Source: University of Cambridge Center for Alternative Finance, Citi Research
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Source: University of Cambridge Center for Alternative Finance, BP, Citi Research
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&nbsp;
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Figure 3. Geological Distribution of Global Bitcoin Hashrate Shows That China Still Hosts the Majority
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<img src="https://icg.citi.com/rcs/v1/media/icgPublic/akpublic/storage/retrieveMediaFile/6086d17ef43edf1f6c54e1cb" alt="Title: SideBySide - Description: Image|JSON##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##" width="329" height="245" />
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Source: University of Cambridge Center for Alternative Finance, Citi Research
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&nbsp;
For more information on this subject, please see <a href="https://www.citivelocity.com/t/r/eppublic/24KYY" target="_blank" rel="noopener">Global Commodities: The intense energy intensity of cryptocurrencies</a>.
&nbsp;
Citi Global Insights (CGI) is Citi&rsquo;s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click <a href="https://ir.citi.com/6A3IURUaezPxFLppsgdBkqidjLaLn558JwHISYaDZcTfE9XMRB1isDDDVorqrxpR%2fTnEi4RUCl8%3d" target="_blank" rel="noopener">here.</a>

As highlighted by Citi’s commodities strategist Aakash Doshi in a recent report, growth in cryptocurrency and digital investments has accelerated dramatically over the past year. Not only has investment increased, but so has the industry’s energy consumption. It now surpasses the energy use of several medium-sized economies. We explore the ramifications, especially as relates to the environmental costs.

Cryptocurrency Consumes a Lot of Energy

Among its many noteworthy distinctions, 2020 may go down in the history books as an important year for the normalization of cryptocurrencies such as Bitcoin and other blockchain-based assets. The tumultuous 12-month period ended with rapid cryptocurrency adoption and record prices.

Cryptocurrencies Make a Move to the Mainstream

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Cryptocurrencies Make a Move to the Mainstream

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