A borderless, decentralised, peer-to-peer system not under the control of banks, governments or financial institutions, conducted entirely online with secure technology, is clearly appealing.
But the process is largely unregulated, with huge amounts of complex data shared globally vulnerable to cybercrime. Plus, the volatile nature of the market creates unpredictable peaks and crashes making trading a risky endeavour.
What is clear is that crypto-trading is not going away any time soon. Here we review how the landscape is likely to develop over 2022 and how businesses can improve their handling of complex data associated with this disruptive digital asset.
Cryptocurrencies – from fringe to mainstream
Cryptocurrencies are a type of virtual cash that exist electronically – there is no physical product. A cryptocurrency is secured by cryptography and managed by a peer-to-peer system rather than banks or financial institutions. This means lower transaction fees but also no-one to step in if something goes wrong.
Cryptocurrencies are held in a digital wallet, like an app that works as a bank account. As their use as legal tender is limited, they are generally held by investors who expect their value to rise, and therefore many central banks refer to them as cryptoassets rather than cryptocurrencies. The currencies are bought with real money via a cryptocurrency broker and are priced solely on what the market will bear. This makes values unpredictable.
Creating new cryptocurrency is known as ‘mining’ (by solving complex mathematical equations) and transactions are recorded on a public ledger using blockchain technology. This means data can be shared globally to verify transactions and prevent fraud.
Many cryptocurrencies have become household names, most notably Bitcoin, with other top performers including Ethereum, Tether and BNB. Cryptocurrencies are no longer a fad traded in the fringes. Goldman Sachs recently announced that its wealth management division would soon offer crypto investments to private equity clients, and Morgan Stanley will allow clients with a net worth of at least $2 million to invest in crypto exchange traded funds. Even Credit Suisse suggested Bitcoin and other cryptocurrencies could become one of the most reliable stores of value.
As interest and investment grows, and new players jostle with incumbents, data formats, volumes, complexity and regulation are likely to surge. Here are some of the areas that can take digital currencies from the niche into the mainstream.
What’s driving growth?
Loved or hated, the impact of cryptocurrencies is widespread. Key trends set to influence virtual tender will include:
Legislation – as countries better understand, manage and benefit from cryptocurrencies, so too will their acceptance as a means for regular transactions, and therefore their rules and regulations. The ability to reduce cross-border frictions in transactions will be important if more countries legitimise or adopt cryptocurrencies. However, financial accessibility and inequality may hamper rapid and widescale adoption.
Digital banking – as digital banking continues to grow, central banks are expected to issue digital coins to compete with cryptocurrency as the demand for digital transactions soars. More countries may follow Japan and Sweden’s lead of trialling their own central bank digital currencies (CBDCs).
NFTs – non-fungible tokens, or NFTs, are digital assets that represent a real-world or virtual item such as video, art or music, and can be used to transfer rights both in physical and digital property. This month (April 4) UK Chancellor Rishi Sunak asked the Royal Mint to create an NFT as part of a bid to make the UK a hub for cryptoasset technology. In March, Ukraine announced it would issue NFTs to help pay for its military after the Russian invasion. NFTs are considered a subset of crypto and are contributing to the rise in the world of decentralised commerce, with some worth millions of pounds. However, opinion is split as to whether NFTs will really take off.
Cross-blockchain bridges – these ‘bridge’ systems allow users to transfer assets and data between different blockchain networks. This reduces the delays and costs associated with incompatibility, allowing swifter chain-switching and thereby the freer flow of crypto assets. Greater interoperability and multi-blockchain projects will facilitate more peer-to-peer swaps.
Blockchain gaming – the industry grew by 765% year-on-year in 2021 making free-to-play blockchain games a market to watch. Several of the biggest games-makers mooted introducing NFTs into their gameplay while the ‘play-to-earn’ gaming trend is set to grow where regular play is rewarded with cryptocurrency.
What this means for businesses
All these trends point to one thing – an upward direction in all things cryptocurrency, whether that’s data volumes, data formats, complexity, stakeholders, innovation, and regulation.
Key considerations about the implications for a business include:
Businesses need technology that can handle new types of data at speed, reconciling complex information between systems, not just within the company but also with third parties around the world. Potentially facilitating cryptocurrency transactions is a big technology challenge that demands an overhaul of a company’s tech stack or the implementation of systems that can work with legacy infrastructure in an efficient way to ensure data continues to be reconciled with no loss of customer service or security.
The cryptocurrency landscape offers growth but also risks volatility so it’s vital to have intelligent, flexible technology that can scale up or down according to the market.
While cryptocurrency trading is largely unregulated (part of the attraction), laws vary depending on country and region – El Salvador has made bitcoin legal tender while China is one of nine countries that has banned it. This disparity in regulation means different expectations and different levels of scrutiny on the data handled as concerns include risk of financial loss, misleading advertising, extreme price changes, security issues and market manipulation.
The European Union has been developing its Markets in Crypto Assets (MiCA) regulations since 2020. This is currently going through the legislative process. It aims to simplify the rules for crypto businesses including issuers and service providers. Indeed, despite cryptocurrency’s libertarian image, many cryptocurrency exchanges froze their Russian accounts in light of the war in Ukraine.
Given the current inconsistencies, it’s vital that a business’s data processes are secure, compliant and transparent to meet the challenges of cross-border disparities.
There are currently some 18,000 cryptocurrencies circulating – 10,000 active and the rest inactive or worthless – with new names entering and leaving the market every month.
The rise in trading volumes combined with an increase in digital assets means there is more data to track, keep secure and make demands on. Reconciling this information logically, efficiently and at scale is key, whether it involves reconciling blockchain, bank statements or cash money, or a combination.
Operating in the fast-packed, fickle environment of cryptocurrency demands an agile reconciliation system that can:
- • Scale to business demands
- • Handle complex volumes of data at speed
- • Offer comprehensive audit trails
- • Mitigate risk and ensure data integrity
- • Provide intelligent, real-time workflows
- • Be supported by an experienced team offering advice and reassurance
Automating your reconciliation processes ensures peace-of-mind, robust tracking and review tools, and access to accurate, rich data workflows for better customer service and transparency.
The cryptocurrency landscape will continue to evolve in unpredictable ways. Having the right processes in place for data management and reconciliation will empower businesses operating in this disruptive and exciting environment.
Automated reconciliation with Aurum
We are financial data matching software specialists. For more than 14 years Aurum has been helping some of the world’s most recognisable brands achieve their reconciliation goals.
We help put businesses in the driving seat with their data, ensuring compliance and control with a quality product tailored for each client’s needs. We work across industries and have a diverse client list including Center Parcs, Ladbrokes, Fullers, and Versapay. Our partnership approach ensures we’re always on hand on your reconciliation journey.
Let us show you how our technology can help you navigate the cryptocurrency landscape via automated reconciliation. Book a demo
with us now.