1. China will continue to influence the industry

China arguably became the most influential international actor in the cryptocurrency market in 2019, to a large part displacing even the United States in this regard. However, we believe that in 2020 the “boy who cried wolf” effect will gradually reduce market reactions to news of Chinese state reactions to the industry. Especially after the recent story when the mention of bitcoin in the main newspaper of the country turned out to be nothing more than a provocation. It seems to us that the process itself will force many participants to reformat the industry, both on the China territory and beyond.

Changes to the regulatory environment will especially affect miners. Although Beijing has declined to ban mining outright, a national cryptocurrency policy will encourage miners to relocate their operations to other jurisdictions. Incidentally, we already saw this in part in 2019. Even Iran joined the list of countries now attractive to cryptocurrency miners, and the United States has grown its own mining capacity. Presumably, the US will support the continuation of this trend as it attempts to compete with blockchain and state currency developments in China.

Many of the advantages offered by cryptocurrencies and blockchain, in general, are taking hold in China, which is investing more into the industry than all other countries. In 2020, we will with no doubt begin to see the first fruits of this focus. At the same time, these technologies will contribute to the Chinese state’s control of its people and economy, although this will not negate their other benefits such as speed, reduced costs, and solving the problem of trust.

2. Central Bank Digital Currencies

Along the same lines, we believe the most anticipated currency of our day is the digital yuan. Given China’s leading position in the world economy, a digital currency will be a significant change in the global financial system. China has been actively introducing numerous modern technologies into its citizens’ daily lives, so we have no doubt that the party’s plans will come to fruition as the crypto yuan spreads rapidly.

2020 also may be the year other countries release their own digital currencies, but the crypto yuan will most likely appear first.

The addition of Central Bank Digital Currencies to states’ agendas is largely due to the increased recognition of the potential of cryptocurrencies in general and stablecoins in particular. International organizations such as the International Monetary Fund and the Bank for International Settlements (BIS) have repeatedly expressed their opinions that central banks should begin developing their own analogs to modern cryptocurrencies.

Interestingly, digital currencies for certain regions have also been discussed — in particular for the BRICS countries (Brazil, Russia, India, China, and South Africa). China can probably offer its national cryptocurrency for this role, in a move which is fully consistent with Chinese plans for its use in international settlement. Of course, this does not mean that the other countries in BRICS will agree to this suggestion.

The European Central Bank is also preparing to develop its stablecoin and has already set a working group. So it is likely that soon we will find out about the project, which will be a kind of hybrid cryptocurrency with the features of stablecoins and regional currency.

In the further future, we can expect a single global digital currency. In October 2019, the Bank for International Settlements held the first G20 Central Bank Governors Summit which discussed the idea of a global cryptocurrency. In Switzerland, Benchmarks Regulation and the Swiss Central Bank have already created a center for the development of a single settlement token among the world’s central banks.

All of these facts indicate that the transition of states to digital currencies is simply part of the next stage in mankind’s development — and its appearance is rather a matter of time.

3. Strengthened Ties Between the Cryptocurrency Market and the Global Economy and System

The cryptocurrency market was previously considered a separate, closed system, with inscrutable trends and movements. Now, we are witnessing the gradual integration of these markets into the global financial system, as well as deeper repercussions in the crypto industry from economic and political events. Of course, we are far from seeing cryptocurrencies able to exert an equally powerful effect in the other direction, as their overall market capitalization is still much too small.

In 2019, against the backdrop of a trade war between the United States and China, Bitcoin began to be regarded as a “safe haven” asset. It was, however, only one of several such assets, which also included gold. Bitcoin was generally used more to diversify a portfolio than to confidently store a large percentage of wealth. Economic and political instability in certain countries — Venezuela, Argentina, Hong Kong, etc. — also contributed to the strengthening of this role for Bitcoin.

Many negative predictions have surfaced for 2020, foretelling a crisis for the economic and financial system that will be many times more serious than the 2008 crisis. In particular, the introduction of negative interest rates by central banks, the growth of global debt, and the slowdown of world production are named as reasons for concern. However, these challenges may prove opportunities for Bitcoin and other cryptocurrencies, which can establish themselves as a means to preserve accumulated capital.

In addition, a series of events is expected in 2020 that will have rippling effects across the globe. Among these is Brexit, the United Kingdom’s departure from the European Union. There is some speculation that, after Brexit, the UK will turn to cryptocurrencies to solve difficulties with international financial transactions.

Finally, the US presidential election is coming in November 2020, and the result could affect that country’s policy on cryptocurrency. Even in 2019, brief Twitter statements by the President of the United States significantly influenced the mood of the cryptocurrency market.

4. Messengers and Social Networks as Players in the Cryptocurrency Market

Today, messaging apps are striving to become more universal, offering the functionality of both marketplaces and digital wallets. The most notable contenders are:

The TON blockchain network and GRAM cryptocurrency created by Telegram The developing blockchain ecosystem of Korean giant Kakao, which includes its own Klaytn blockchain network, its own Klay cryptocurrency, decentralized applications (dApps) on the Klaytn network, the largest Korean messenger KakaoTalk, and KlaytnPhone smartphones based on the flagship Samsung model — and another model probably soon to be released based on LG. In the future, the blockchain component will be able to integrate with other Kakao projects, in particular, the KakaoPay payment system and the online banking service Kakao Bank Japanese messaging app Viber and its stablecoin, Rakuten Coin, which will be exchangeable for fiat on the Rakuten Wallet exchange and is maintained by the messaging app’s owner, Rakuten. The company will likely announce long-term plans to integrate this stablecoin into the recently launched Moneytou payment service; The ecosystem of the Canadian messaging app Kik, based on the Kin token (which runs on the Stellar blockchain).

An even more grandiose development was conceived by Facebook, which presented the project of the universal stablecoin Libra this year, access to which could be available to all its users, that is, more than 2 billion people around the world. However, this announcement ultimately played against Facebook. Most countries made it clear that they would not allow the launch of the currency within their borders. As a result, Facebook decided to move away from the project, as CEO Mark Zuckerberg recently informed the United States Congress.

It is noteworthy that Facebook, Telegram, and Kik each had to deal, in one form or another, with US authorities in 2019, and their projects’ prospects were significantly hindered as a result. This indicates how seriously the American government takes the capabilities of these projects.

Thus far, prospects look more positive for Asian messaging apps: Japan’s Viber and South Korea’s Kakao. Both messengers are clearly planning to develop their projects at an international level, and we will see new stages of development for both in 2020.

5. The Development of Decentralized Finance (DeFi)

In 2019, decentralized finance (DeFi) began gaining popularity. The essence of DeFi is to provide financial services built on blockchain and smart contracts. Most such services today are cryptocurrency lending platforms, as well as derivatives markets, decentralized exchanges, and payment solutions. The algorithmic stablecoin DAI is in this segment as well. However, this is only a small part of the financial services and tools which can be transferred to the blockchain.

Based on DeFi Pulse’s data gathered directly from the blockchain, DeFi on the whole doubled in volume across 2019. According to Genesis Global Trading, $870 million in cryptocurrency loans were issued in Q3 2019 — a 250% increase over loans in Q3 2018. The total volume of loans has already exceeded $3 billion.

The volume of interest from investors confirms the industry’s confidence in DeFi, which is the second most popular investment category for the largest funds focused on cryptocurrencies and blockchains, according to The Block analyst Ryan Todd.

One of DeFi’s defining characteristics is a strong preference for the Ethereum network, where it has taken the place of the collapsed ICO market. The success of Ethereum’s update roadmap in 2020 and its ability to withstand growing congestion will determine the development path of many DeFi projects.

However, Ethereum is not the only game in town. Ripple has announced a new DeFi focus, including a new project that bills itself as a “bankless” bank account. We can expect active DeFi development on other blockchains in 2020, perhaps even on blockchains which are little known to the public.

Some new projects may be associated with large banks and corporations. Forbes recently ranked DeFi as one of the major trends in the fintech sector in 2020, indicating how much of the market the sector might capture.

6. Staking May Revitalize the Market and Repurpose Major Players

Proof of Stake (PoS) mining algorithms were proposed back in 2011, and the first implementation was completed in 2012. Proof of Stake was suggested as an alternative to Proof of Work (PoW). In Proof of Stake, the chances that a block is formed by a network participant depends not on that participant’s computing power but on the amount of the network’s cryptocurrency — “stake” — that participant holds.

In 2019, staking gained significant popularity, while at the same time gaining new centralized characteristics. Cryptocurrency exchanges and custody solutions began to offer interest on the storage of cryptocurrencies using the PoS algorithm. As a result, large exchanges have already become leading nodes on some Proof of Stake blockchains.

The most popular ways to quickly earn money on cryptocurrency were once mining and trading, but now there is a simpler alternative: staking on an exchange. In this case, the user does not need to deal with the technical details of mining, nor master the complicated techniques of trading.

One of the main problems associated with staking is the increase in centralization it causes, which has already drawn criticism of Proof of Stake algorithms from the crypto community.

At the same time, staking essentially turns cryptocurrency exchanges and custody services into investment banks of a sort, increasing the number of functions they serve in the industry and, in parallel, their influence. This was one of the main reasons that cryptocurrency exchanges in 2019 led the industry in total funds raised.

Judging by the growing popularity of centralized staking, we can expect that next year it will become one of the main objects of discussion and regulation in many countries.

7. The Legal Status of Stablecoins will be Determined

The interest in stablecoins that arose in 2018 returned with renewed vigor this past year.

During 2019, various companies announced the issuance of their own cryptocurrencies backed by fiat currency or commodities such as precious metals or gemstones. The climax of this trend was the Libra project from Facebook, which we mentioned above. It was Libra that made national governments consider the possible consequences of the widespread use of stablecoins — namely, the potential impact on established financial, economic, and social systems.

It was stablecoins issued by commercial organizations, not Bitcoin or other cryptocurrencies, that were recognized as a threat to the financial system in the United States, Europe, and East Asia. In 2019, legal and economic assessments made up the extent of regulatory feedback on stablecoins, including recommendations from international organizations. However, it is now obvious that in 2020, or shortly thereafter, laws will be adopted in the leading countries of the world to regulate fiat-backed cryptocurrencies. If Libra is any indication, stablecoins will be subjected to severe restrictions. Bills have already been written in the European Union and the United States to this effect.

Still, it is worth noting that the government of Bermuda has allowed taxes to be paid in the stablecoin USDC, despite the negative assessment of stablecoins made by most states.

In any case, stablecoins are being actively developed. In 2018 and 2019, venture capital funds invested $200 million in the industry.

Since the start of 2019, the capitalization of stablecoins has nearly doubled, mainly due to Tether (USDT). Tether remains the undisputed leader in market capitalization and in trading volume, where it often leads even Bitcoin. But in addition to use on exchanges, Tether began to gain popularity as a settlement currency for purchasing goods and services. The advantage of using USDT is its simplicity and speed for cross-border transfers. Tether demonstrates that it is easier for stablecoins to gain mass distribution than it is for Bitcoin or altcoins. By pegging value to a fiat currency, the problem of unpredictable volatility characteristic to Bitcoin and other cryptocurrencies is removed.

It is often noted that stablecoins could reduce the dominance of the US dollar and stimulate international trade relations.

While Tether still dominates the stablecoin market, it has serious problems within the US judicial system, where two lawsuits have been filed against it. Proceedings will take place this year. This fact, and the trend towards strict legislation on stablecoins, gives us reason to expect that Tether will be supplanted by alternatives issued either by large corporations — which will have all necessary licensing from governments — or as Central Bank Digital Currencies by the states themselves. The presence of CBDCs would essentially eliminate the need for USDT and similar assets. In fact, USDT and other stablecoins may even be banned or at least confined to the ecosystems of the entities which issue them.

8. The regulation will Grow Stronger

In 2019, most countries were actively developing legislation to regulate the cryptocurrency market. In many of these lands, the new laws begin to take effect in 2020.

In addition, the Financial Action Task Force’s anti-money laundering requirements were released and should be integrated into government legislation around the world by the summer of next year.

Thus, in 2020 there will be tightening regulation on the activities of cryptocurrency companies. “Know your customer” (KYC) and anti-money laundering (AML) requirements will become widespread, and user verification will be required of all legally operating cryptocurrency sites.

If any platforms continue to not require verification, then will likely lose any fiat gateways, making it extremely difficult for users to withdraw digital assets from them into fiat or to use those assets as a means of payment. And given the blockchain’s auditability, crypto assets from these platforms may simply not be accepted by other sites.

All of this may lead to the disappearance of those who use cryptocurrencies precisely because of the anonymity and freedom from state control that they offer. However, this new regulation is one of the necessary conditions for the arrival of institutional players and the integration of cryptocurrency into the real-world economy.

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