The SEC's approval of Bitcoin ETFs in January and its somewhat unexpected preliminary approval of Ethereum ETFs signify a shift in regulatory stance. While no legislation has been enacted, progress has been made on key bills. The FIT21 market structure bill passed the House with bipartisan support, and renewed hope exists for a stablecoin bill. Notably, President Biden's veto of the resolution repealing the SEC's SAB 121 rule, which has discouraged banks from offering custody of crypto assets, was accompanied by a call for collaboration on a comprehensive solution. This suggests crypto legislation might gain momentum in the current political climate.
The Rise of Tokenization: Another promising development lies in the tokenization of traditional financial assets for blockchain-based trading. This technology holds promise for 24/7/365 global trading with near-instantaneous settlement. While significant investment and work is needed to achieve standardization and scale, successful pilot programs have amply demonstrated the feasibility of this concept.
An Evolving Crypto and Blockchain Value Proposition: Crypto’s comeback is also linked to an evolving value proposition for digital assets. Bitcoin’s pseudonymous inventor, Satoshi Nakamoto, envisioned a "peer-to-peer electronic cash system" bypassing traditional intermediaries who guarantee payment but at added cost viewed as the “inherent weakness of the trust based model.” In reality, trust and trusted intermediaries are still necessary for broad crypto adoption. The recent success of Bitcoin ETFs indicates that many investors prefer investing through established financial firms like Blackrock and Fidelity. These intermediaries offer a layer of security, convenience, and integrated portfolio management for crypto and traditional assets, even if these benefits come with some cost. Because blockchains cannot directly move cash, the predominant crypto payment use case today is the settlement of crypto trades on blockchains with stablecoins pegged to dollars, euros, or other national currencies. Trust in stablecoins depends on trust that the issuer has the reserves to fully back the coin and both Europe’s new crypto law and the U.S. draft stablecoin bills establish licensing and regulatory requirements designed to ensure stablecoin issuers behave like traditional trusted intermediaries. (They also generally grant existing banks an easy entry path into becoming stablecoin issuers.)
Cryptocurrency as a true form of retail payments has seen only limited adoption to date. Crypto cards, for example, generally operate by redeeming the cardholder’s crypto for local currency behind the scenes so that the merchant sees a debit card payment in local currency and is not directly accepting crypto. Cryptocurrenies have established a valuable role in international remittances and seen some acceptance as a payment vehicle in countries with unstable currencies or capital controls, but these are niches in the larger payments world. Unfortunately, crypto is also used for illicit payments but concerted law enforcement efforts supported by blockchain analytics are making this increasingly risky over time.
In essence, the "newest new thing" isn't consumers abandoning traditional finance, but rather seeking ways to integrate crypto into their financial lives as a new asset class. Traditional finance, in turn, seeks to utilize the blockchain technology that supports crypto for a wide range of trading, settlement, and payment use cases applied to traditional assets. With the significant investments being made, the future of crypto appears to lie in collaboration and innovation.
The following sections delve deeper into conference themes, providing a more in-depth analysis.
Crypto Price Recovery
The adage that a rising tide lifts all boats holds particular truth for financial markets. While it is impossible to fully link specific events to price trends, a few things stand out. First, despite the turbulence experienced by the market, including bankruptcies and legal actions, progress continued through the downturn in critical areas, including tokenization, increasing adoption of smart contracts, the Ethereum conversion to proof-of-stake, the growth of higher-performance blockchain solutions like Avalanche, Solana, and Stellar, and the continued growth of crypto for remittances and other uses in countries where currency controls or instability fuel demand for a safer store of value than local fiat currency. (Note that a few speakers are still predicting Bitcoin will become the world’s universal currency, but none are predicting it will happen quickly.) Legal and regulatory developments, discussed next, are also likely helping to lift prices.
Favorable U.S. Legal and Regulatory Developments
Compliance rests on culture, so I will start there. The opening session, “The OG Survivors,” celebrated the market resurgence while acknowledging the veteran attendees who have consistently participated in all nine Consensus conferences. In cryptospeak, “OG” means “Original Gangster,” a persona few ever embraced but created a perception that was true enough to be hard to live down. The market crash exposed several major industry actors operating far outside the bounds of prudence, ethical conduct, and legal compliance. Most of them are gone and some true OGs are sitting in jail. Blockchain analytics firms have significantly aided law enforcement efforts and empowered responsible participants to identify and isolate bad actors. Binance, the industry’s largest exchange, negotiated its survival with the U.S. Department of Justice by agreeing to substantial fines, a guilty plea with incarceration for its CEO, and the installation of new leadership publicly committed to a strong compliance culture. For the record, the term "gangster" was absent from all discussions, even within the "OG" session. Indeed, this conference showcased a financial industry group demonstrably eager for new laws and regulations. Moving forward, the cryptocurrency industry is embracing the same compliance standards that apply to established financial sectors.
While new legislation is unpredictable, several factors support increased optimism for new U.S. laws and regulations, possibly even in the current Congress. The anticipated approval by the SEC of Ethereum-based ETFs, coupled with existing Bitcoin ETFs, would grant U.S. investors regulated access to roughly 70% of the cryptocurrency market by market capitalization. Three prominent legislators, Representatives McHenry (R-NC) and Emmer (R-MN), and Senator Hagerty (R-TN), all spoke at Consensus. Each stressed the significant level of bipartisan support for FIT21 and the recent, more-favorable positions taken by Senate Majority Leader Schumer and President Biden as cause for hope. They unanimously view the advancement of legal and regulatory frameworks in other financial centers, particularly the new European Markets in Crypto Assets regulation, as a catalyst to prevent the U.S. from falling behind. Perhaps most importantly, the traditional securities and banking firms (TradFi) firmly support the crypto legislation required for broad adoption of tokenization, in particular, a stablecoin bill and a repeal or reinterpretation of the SEC’s SAB 121 custody accounting rule.
Tokenization
A major development announced at a cryptocurrency conference in late 2022 was KKR's tokenization of a portion of its healthcare private equity fund. Securitize, a registered broker-dealer specializing in digital assets, facilitated the distribution on the Avalanche blockchain, marking an early example of real-world asset (RWA) tokenization. Since then, a string of successful pilots has shown the industry that both traditional securities and illiquid investments can be tokenized, issued, traded, and settled on-chain. At Consensus, the big news related to RWA tokenization was a joint announcement by the DTCC, Clearstream, and Euroclear. These industry infrastructure leaders unveiled a framework for an industry-wide ecosystem for tokenized assets, the Digital Asset Securities Control Principles (DASCP). The framework, developed with the help of BCG, is an impressive step toward a global industry standard that could, over time, replace today’s security infrastructure with a new one built on crypto rails.
During Consensus, but by coincidence, the major U.S. exchanges converted their back-office settlement cycle from T+2 (trade Monday; settle Wednesday) to T+1 (trade Monday; settle Tuesday), continuing a process that began in 1995 when markets were at T+5. While a positive development for the industry, this shift helps explain the intense interest in tokenization and blockchain technology. The U.S. market has taken nearly 30 years to move from T+5 to T+1, but with restrictions on many activities to U.S. business days, and U.S. banking hours. Direct market participation is limited to registered U.S. entities with direct or bank-facilitated access to Fedwire accounts. By contrast, blockchains, first used in 2010, can allow any entity meeting Know Your Customer or other qualification criteria in a smart contract to trade and settle any crypto asset 24/7/365 within minutes, i.e., T+0, with any similarly qualified counterparty worldwide.
The DASCP cites research indicating an industry move to on-chain settlement could produce $15- to $20-billion in annualized operational cost savings and free up $100 billion tied up as collateral within the system. These are substantial potential benefits, but major investments and significant progress are required in the areas of law, regulation, comprehensive industry standards, and technological development before this broad vision could become reality. Netting of trades for settlement, which reduces the movement of shares and funds, is a good example of a function that does not have a direct analogy in today’s crypto world and limits the potential for immediate trade settlement, but that market participants rely on and may well wish to replicate.
Short Takes
Two other items stood out:
Crypto ISAC: Everyone who follows crypto is aware of the vast sums lost annually to hackers and scammers who steal cryptocurrency or use it to receive or launder stolen funds. A group of major players, including Coinbase, Circle, Fireblocks, and the Solana Foundation, announced a new industry-wide information sharing association modeled after the financial industry's FS-ISAC entity to collaborate against cyber threats.
AI and Crypto Synergy: A half-day track was devoted to this topic, but there was limited consensus among the various panelists and speakers. All agreed that crypto and AI startups compete for talent and funding, with AI easily winning in part because top U.S. tech talent prefers to avoid the risk of prosecution. Regarding synergy, the most persuasive argument I heard centered on the need for massive numbers of smart contracts to meet new tokenization standards for RWAs. Generative AI is a powerful technology that could significantly accelerate this development.
Many conference participants articulated a vision for cryptocurrency's most promising future: not as a completely separate financial system replacing existing institutions, but as a transformative force within traditional finance. Regulatory progress on the U.S. front is likely, driven by the industry's need for congressional and executive action, and the government's commitment to upholding U.S. and dollar preeminence in the financial sector. While the timing of congressional action remains uncertain, it will be a key factor in determining the pace of progress. This vision for the future is significantly more optimistic than one could have imagined during the market crash eighteen months ago.
