After the drama punctuated by doldrums (or is it the other way around?) of 2022, many of us glass-half-full types have been welcoming the opportunity to focus less on market moves and more on the impact that the continued development of crypto technology can have on the world. And it’s potentially a pretty big impact, nothing less than the spreading of economic opportunity and individual empowerment while rewiring finance and culture, so it certainly deserves more attention.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
When we talk about focusing on technology, we generally mean ways to store and distribute information on networks with varying degrees of decentralization, which in turn will power new forms of engagement and economic activity. What is still largely overlooked is the potential that crypto technology has to support innovation in other areas of development. That impact will be felt well beyond blockchains, finance and culture.
The root of this influence lies in crypto markets. This may sound surprising given the devastating losses, bad actors, painful exploits and regulatory clampdowns defining the markets of recent months. It may also appear incongruous given the “institutionalization” of market experimentation, with banks and official organizations testing familiar forms of issuance with new types of settlement – hardly the technology boost I’m referring to.
To pull on this thread a bit more, I need to take a step back in time.
Newcomers to the manic world of crypto markets may not be aware of their origin. The first peer-to-peer crypto trades were done on what were essentially online bulletin boards – low cost, easy to spin up, with a high degree of trust required. These evolved as demand grew, but early iterations were still rudimentary, uncoordinated and making it up as they went along. Then they started to get more sophisticated, especially as professional investors got interested, and today they are a complex amalgam of services, structures and best practices designed to support a considerable flow of funds throughout the system.
They are not nearly as complicated as traditional exchanges, however. In part it’s due to simplified settlement and storage. In part it’s because while tendrils now extend into traditional finance, crypto platforms still operate largely in a niche area that regulators have yet to fence off with volumes of rules. What’s more, they are easier to spin up in a variety of configurations, such as centralized order book, decentralized liquidity pool or an as-yet-untested new structure. That relative flexibility, not enjoyed by traditional exchanges, is one of the crypto ecosystem’s superpowers.
It does introduce risks: The often-lamentable lack of transparency of platform operators, the absence of regulatory protection, hacks as well as code errors are just some that come to mind. But as familiarity grows, technological solutions improve, interfaces evolve and regulators start paying more attention, many of these can be mitigated. Innovation is about focusing on potential while implementing safeguards – and here is where the flexible structure of crypto markets comes in.
The relative ease with which blockchain-based protocols and applications can raise funds by creating tokens and distributing them to users and/or investors is by now well-known. “Initial coin offerings” (ICO) drove the hype bubble of 2017, with harsh lessons learned in the subsequent shake-out. Since then, however, tokens have often worked in tandem with equity stakes to kick-start or boost economic activity on new layer 1 blockchains, decentralized applications and creative initiatives.
Blockchain-based fundraising for blockchain-based projects: we get that. What we are overlooking, though, is the potential crypto has to support fundraising and engagement for other, unrelated technologies, and what’s more, it can do so almost anywhere given crypto market structure flexibility.
- A regional bank in Luanda sets up a platform that tokenizes tranches of loans to startups aiming to bring digital efficiency to Angola’s ports, mitigating lender risk by adding liquidity and thus lowering the financing costs.
- An incubator in Addis Ababa works with the Ethiopian Ministry for Innovation and Technology to develop an exchange for the trading of equity-like tokens issued by exiting startups with ideas ranging from vertical farms to satellite launch sites.
- A venture fund in Accra collaborates with the Ghanaian stock exchange to launch a crypto platform that facilitates token-based fundraising, ICO-style but with official oversight and sufficient disclosure, helping projects from telehealth to e-learning get off the ground and find a market.
Politicians across the developing world can be heard touting the importance of technology on economic growth, but few actually implement policies that move the funding needle. Raises outside the usual hubs tend to be small as pools of capital are less abundant than in the developed world and as the target demographic is often more limited in size given geographical as well as network restrictions. But this doesn’t always need to be the case. More liquid, transparent and innovative markets could kickstart regional development, especially if cross-border investment is allowed, possibly leading to tech initiatives that are global in scale.
Obviously, digital ledger platforms are not essential for this type of fundraising. Startups have been closing rounds, banks have been lending and grants have been funneled without them so far. But the transparency and immutability of public blockchains could give additional assurances to lenders, investors and startups, eventually encouraging more interest from a greater range of participants. And they are easier to spin up than traditional exchanges, lowering time- and cost-to-market.
Now, I’m not a trading systems engineer or a blockchain developer, so there are parts of this framework I’ll probably get wrong, but the rails on which the assets move already exist, and on-ramps are not as hard to design now as they were a few years ago. Platforms have emerged that essentially offer a plug-and-play back-end for exchanges, and the ecosystem has evolved to allow a degree of modularity in constructing the necessary stack of services – wallets, custody, know-your-customer, staking, tax accounting and more. The complicated part, I imagine, would be connections to banks or payment services, but the growing use of stablecoins can provide a stopgap while the market adjusts.
What of the regulators? Obviously, they’re going to want to have some say as to user protection, fund flows, foreign influence, etc. And anything new means risk, which regulators don’t like. But improved funding channels for local technologies that could boost employment, tax revenues and regional status while offering transparency as to asset distribution shouldn’t be too tough a sell, especially as governments change and/or are increasingly influenced by younger voters eager for the opportunity to work on progress. There could also be pressure from local institutions eager for a broader variety of assets with which to construct portfolios, as well as well as excitement from retail investors who do not live in more developed financial systems with more stable currencies and more readily available savings vehicles.
This is possibly naïve, because change is hard. But change is happening anyway, not just in local demographics, economic priorities and political sentiment. We are witnessing the reshaping of spheres of dependence, at a time when new tools of independence are gaining in resilience and reach. Fundraising and engagement farming examples set in areas with sophisticated financial systems will no doubt be noticed in regions searching for a new status.
They will also be encouraged by bright minds outside the typical hubs who are pushing for progress on projects that could end up contributing to human development. Crypto’s market flexibility is about much more than the ease with which tokens can be spun up, purchased and transferred – it is about facilitating economic activity in all areas. In sum, it is a superpower with a potential impact that goes well beyond its initial remit.