Cryptocurrency, Libra and Institutional Investors

Bitcoin triples in value in 2019 H1 - time to take a closer look?

With all that is happening in the cryptocurrency space right now, it seems a good time to review cryptocurrency as an asset class. Most asset allocators and consultants would argue that cryptocurrency, having no intrinsic value, is not a suitable long-term asset for institutional investors. However, it's still important for us all to understand the impact that digital currencies and Blockchain will have on the financial future.

From an investment perspective, Bitcoin and Gold share similar characteristics. Both are viewed as an alternate store of value. Both have a relatively fixed supply, and so both have scarcity value during times of monetary expansion. Both would be beneficiaries of a loss of faith in sovereign debt. With policymakers having few tools to fight the next downturn, it's no coincidence that the latest surge in the prices of Bitcoin and Gold coincides with the Fed's prognosis of a weaker economy.

Bitcoin has of course received an additional boost from Facebook's Libra. Libra might be described as "Fiat value transported on cryptocurrency rails". With its price determined by reference to a basket of major currencies, it has no investment upside. But Bitcoin investors hope that Facebook's Calibra, in providing digital wallets, will be the Trojan horse that introduces billions of people to cryptocurrencies. Libra itself - as currently proposed - is more of a competitor to payment systems and central banks, raising the spectre of Facebook as a "shadow bank". It's no surprise, therefore, that Facebook faces immediate scrutiny from US and European authorities. The work being done to investigate the feasibility of Central Bank Digital Currencies (CBDCs) has been given an increased sense of urgency.

The reports below explore all of the above issues; we've selected papers that cover how institutional investors should view cryptocurrency investment, the introduction of Libra, the use of Blockchain and Central Bank Digital Currencies.

Libra and Stablecoins

The Official Libra White Paper: An Introduction to Libra (Jun 2019)

This document outlines Libra's plans for a stable value cryptocurrency, which will be used by Facebook in its Calibra digital wallet.

Libra: a review of Facebook's entry into cryptocurrency (Binance, Jun 2019)

This report takes an in-depth look at Facebook's long-anticipated entry into cryptocurrency.

Facebook's Blockchain Plans: Why are they doing it? (CoinShares blog, Jun 2019)

Calibra will be launching a digital currency network called Libra, which will have a digital currency called GlobalCoin. For us, despite the hype being made of it, this is a moment to ask not ‘what, but why?’ And ‘Why now?’. I’d like to share a few key insights on why we think Facebook is going down this route, and to outline what it might mean for the cryptocurrency industry...

Stable Value Coins and A Trust Framework for Fiat-Backed Versions (PwC, 2019)

This paper examines the world of stablecoins—a class of cryptographic token that aims to hold a stable value compared to a reference asset. It discusses three approaches to stablecoin, looks at the early results in terms of performance, and compares stablecoin approaches against ‘normal’ cryptocurrencies such as Bitcoin.

Institutional Investors and Cryptocurrency

Handle with Extreme Care! Our Take on Cryptocurrencies (Callan, 2018)

In this 2018 paper, Callan outlines its belief that blockchain technology shows promise, as do alternative forms of currency. But the consultant does not recommend that institutional investors allocate to cryptocurrency investments.

Digital Asset Class of the Future - Bitcoin vs Ethereum? (The Economist, 2018)

This 19 page academic paper, published by the Economist, concludes that although blockchain technology has investment opportunities, cryptocurrencies have no intrinsic value and are not appropriate as an investment asset class.

2nd Global Cryptoasset Benchmarking Study (University of Cambridge JBS)

This compehensive 96 page report on the Global Cryptoasset Industry examines a wide range of different market segments, including mining, exchange, storage & custody, security and payments.

2019 Crypto Hedge Fund Report (PwC)

This report provides an overview of the global crypto hedge fund landscape and offers insights into quantitative elements such as liquidity terms and performance, as well as qualitative aspects such as best practice with respect to custody and governance. By sharing these insights with the broader crypto industry, the goal of this report is to encourage sound practices that can be adopted by market participants as the ecosystem matures.

Crypto Research Report (Incrementum, 2019)

This detailed paper (70 pages) takes a deep dive into the world of cryptocurrencies. It examines the roots of crypto, the case for institutional crypto-investors, market sentiment, crypto mining, and much more.

Central Bank Digital Currencies and the Future of Money

Casting Light on Central Bank Digital Currency (IMF, 2018)

This 39 page IMF paper provides an introduction to CBDCs: their benefits, their implications, and possible designs. It also examines potential side effects on the banking system, monetary policy transmission and cross-border payments.

Central Banks and the Future of Money (C.D. Howe, 2019)

Policymakers have been debating the value of creating central bank digital currencies (CBDCs) for some years. Progress has been slow, but this 20 page report from Canadian researchers argues that they will become a necessity - the status quo is not likely to be a practicable option.

Central Bank Digital Currency and Banking (Bank of Canada, 2019)

This academic paper from the Canadian central bank seeks to model the impacts of introducing a central bank digital currency (CBDC).

Monetary policy with a central bank digital currency (Bank of England, 2018)

This 36 page BoE paper discusses the impact the introduction of a central bank digital currency (CBDC) might have on the monetary transmission mechanism.

Blockchain Technology

How Blockchain Will Impact Asset Management (Savvy Investor, August 2018)

Savvy Investor lists a number of papers which describe the likely impact of Blockchain technology on the asset management sector.

2019 Global Blockchain Survey (Deloitte)

Deloitte's 2019 Blockchain survey describes the new ecosystems that are developing blockchain solutions to disrupt traditional business models.

Responsible Investment and Blockchain: A Primer for PRI Signatories (PRI, 2018)

This UNPRI paper explains Blockchain technology and its relevance to responsible investors.

Regulation of Cryptocurrencies

Cryptoassets Taskforce: final report (FCA/Bank of England, 2018)

The Bank of England's Cryptoassets Taskforce report sets out UK’s approach to policy and regulation of cryptocurrency investments and distributed ledger technology.

Time to Strengthen the Regulation of Crypto-Assets (Brookings Institution, 2019)

This 69-page report from the Brookings Institution argues that there is a gap in the regulation of crypto-assets that legislators need to fix. At present, there is no joined up thinking, as different regulators have authority over different elements of crypto-assets regulation.

Crypto Assets Require Better Regulation (Financial Analysts Journal, 2019)

This FAJ article argues that financial regulators need to be more proactive in the regulation of cryptocurrency and addressing market abuse.