Fall Finance Forum answers many questions about cryptocurrency
On Friday, Nov. 5, three cryptocurrency experts spoke at the fall 2021 Finance Forum, “Cryptocurrency—Many Questions and Many Answers.”
Presented by the Reiman School of Finance at the University of Denver’s Daniels College of Business, the virtual event included a presentation and Q&A by panelists Joshua Ross, teaching assistant professor and director of Entrepreneurship@DU; Clark Read, director of trading at Gemini; and Joe McCarney, global blockchain assurance leader at EY.
Originally designed as a medium of exchange, cryptocurrency is also now considered an investment asset class, and its role in the finance world is on the rise. The panelists broke down the nebulous financial buzzword that many people think they should understand, but don’t.
Ross—who teaches the Blockchain, Cryptocurrency and Bitcoin class to undergraduate DU students—kicked off the Forum with an explainer on the history and foundation of digital assets.
Bitcoin, Ross explained, was started anonymously in October 2008 in response to the financial crisis. Its purpose was to create an alternative currency to the U.S. dollar that was decentralized, operating on a peer-to-peer computer network, rather than controlled through one central bank.
Bitcoins are entirely digital, not backed with tangible coins or bills, and are held in online “wallets.” When a bitcoin is traded, a record of each transaction follows its journey. Cryptocurrency exchange is protected against fraud through a system called mining, where savvy users on the blockchain network decide whether the transaction is valid or fraudulent. Fifty-one percent of network miners must agree that the transaction is legitimate for it to go through.
Blockchain is a distributed leger and the underlying technology for Bitcoin. Each transaction is recorded in an open block, and every 10 minutes, a block is closed and a new one is opened, with each block containing several thousand encrypted transactions. They can all be viewed publicly but the data cannot be altered.
Bitcoin now has a market capitalization of over $1 trillion, and, Ross shared, if it were a publicly traded company, it would be No. 6, with the likes of Apple and Amazon. Bitcoin’s value comes from consumer belief in its worth; limited supply (it’s capped at 21 million coins); the inability to censor, shut down or confiscate the currency; and its transferable and transportable nature.
Bitcoin is secure. It can quickly and easily cross international borders. As some institutionalization has occurred, consumer apps like Robinhood—even Venmo—have given armchair investors easy access to buy and sell cryptocurrencies.
On the downside, it’s slow, it’s expensive and the mining process requires a lot of energy consumption. There’s also price volatility, regulatory concerns and the risk of hackers stealing digital assets.
Institutional trading group Gemini, where Clark Read is director of trading, simplifies the process of buying Bitcoin and other cryptocurrencies, such as Ethereum and Elon Musk favorite Dogecoin. He said while banks and financial institutions are starting to adopt digital assets based on client demand, Bitcoin works well as a global store of value, but not for point-of-purchase retail payment since transaction fees are so high.
This dilemma led to hundreds of alternative cryptocurrencies entering the marketplace, which are competing to solve limitations and offer new advantages. Non-fungible tokens, or NFTs, allow many goods and services to be purchased as digital assets on the blockchain—from real estate to art to consumer loyalty points, like airline miles and Starbucks reward points.
Read compared cryptocurrency to the shift from DVDs to digital video streaming services like Netflix—taking the economy from analog to digital.
Cryptocurrency allows the average person to contribute to financial ecosystems and participate in economic growth, even in countries with financial censorship. It allows people to “release their assets from control by specific jurisdictions,” Read said, adding, “The digitization and decentralization of economic activity is a democratizing force that empowers all ecosystem participants in ways we’ve never seen before.”
He addressed the question of how to choose among 2,000+ cryptocurrency tokens in the market. Just as there are many different types of asset classes, sectors and industries within the traditional market, the cryptocurrency ecosystem is no different, he said—it’s just different technology. Each cryptocurrency product has a different use case, and it’s up to the consumer to research their options to decide where they want to put their money.
Lastly, Joe McCarney entered the Finance Forum conversation to discuss regulation. He has led and developed EY’s assurance efforts around blockchain and cryptocurrency and helped develop firm audit methodology and documentation surrounding digital assets.
Digital asset demand, McCarney said, is skyrocketing. The U.S. Securities and Exchange Commission even allowed Bitcoin futures exchange-traded funds in October 2021—the first direct investment opportunity for public investors to get into Bitcoin. The lack of global standardized regulation remains a challenge to worldwide markets, though.
“I never saw Bitcoin as the replacement to local currencies,” McCarney said. “I think there will be some digital asset in the future that will replicate what our currencies do today.”
McCarney said cryptocurrency forces the entire financial industry to mature as more infrastructure, security and a stronger regulatory framework emerge. The first step for cryptocurrency regulation, he noted, is to eliminate anonymity so custodians know who owns the accounts, followed by implementing U.S. tax reporting.
Read emphasized the importance of “operating in the sunshine” by asking for permission, not forgiveness, when it comes to regulatory compliance. He said more integrated communication and coordination among currencies, the blockchain and institutions will be key, as the House Committee on Oversight and Reform works to legislate cryptocurrency through Congress.
As cryptocurrency advances at rapid speed, Ross, Read and McCarney all encouraged attendees to read books and white papers, listen to podcasts and follow online forums to understand the products, what they are trying to solve and who’s behind them before investing.