Two Worlds Colliding: The Rise of Political-Consumer-Digital Partnerships

In April, the US Treasury’s Office of Foreign Assets Control listed a Russian cryptocurrency miner and its 10 subsidiaries as a Specially Designated National—the first in what is expected to be a comprehensive move against Russia’s crypto-mining industry. Why was the US driven to make this novel determination? The answer: The desire to ensure the effectiveness of imposed sanctions.

“By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources,” the U.S. Treasury explained in its announcement. The U.S. Treasury stressed its commitment to blocking Russia’s ability to use such digital assets as a mechanism to offset the impact of sanctions.

This move—while it may be the first of its kind—is not entirely unexpected. As previously discussed in past editions of the Two Worlds Colliding series, cryptocurrency and digital assets are not simply ephemeral concepts that might await us in a distant future, but rather are already enmeshed into the fabric of global financial systems. The US Treasury’s strategic decision underscores the influence digital assets have today in the hands of consumers, institutions, and governments.

In another example of cryptocurrency’s influence on our financial and social well-being, in May investors witnessed the collapse of Luna and the UST stablecoin, which resulted in the loss of billions of dollars in crypto-wealth—shockingly quickly, for some. The crash in UST stablecoin and Luna was partially attributed to the design of the UST stablecoin, which was not backed by the US dollar or other liquid assets. This was by design—the UST stablecoin is an algorithmic stablecoin, meaning unlike an asset-backed stablecoin that maintains a reserve of currency as collateral to assure stablecoin value, the algorithmic stablecoin’s value is maintained by controlling its supply through a computer algorithm. This results in algorithmic stablecoins such as UST stablecoin being susceptible to bank run events, such as when a large number of banking customers withdraw their money simultaneously. Despite this explained difference between UST stablecoin and other cryptocurrencies, the event caused some overarching investor concern on cryptocurrencies broadly—after all, both UST and Luna are part of the Terra blockchain, not dissimilar to Ethereum and Bitcoin.

It is in response to cryptocurrency’s growing influence that we see agencies such as the International Monetary Fund call on global policymakers to develop cryptocurrency standards in consideration of current geopolitical affairs and associated risks to financial stability. Cryptocurrency continues to demonstrate that it is not a thought experiment, but a concrete way to enact real, dynamic, and potentially lasting impacts.

In the sixth edition of the Two Worlds Colliding series, we explore regulatory activity, crypto adoption domestically and globally, security concerns, interesting synergy creation within the financial services industry, and the potential future of digital finance.


Traditional Stock Market Decline Pales in Comparison to Recent Cryptocurrency Crash

As the influence of cryptocurrency grows, so too does the spotlight on its risks – namely its price volatility. According to recent data, bitcoin’s one-year volatility, measured as the rate of fluctuation in a security’s price, stands at 46.9% – significantly higher than the next most volatile assets and asset classes, including oil at 13.2%, US stocks at 5.87% and, US real estate at 6.60%. High volatility has its upsides (dramatic price increases) and downsides (dramatic prices crashes and corrections). So, while most asset classes have had a rough first half of 2022, cryptocurrency has had one of the worst. Since November 2021, the value of cryptocurrency has dropped from $3 trillion to $1 trillion, a 67% decrease. For comparison, the overall stock market has decreased by roughly 20%.

The collapse of Luna and the UST stablecoin are only part of the reason for the cryptocurrency crash. There have been countless other instances that have played a part in the crash. For example, Celsius Network, a leading cryptocurrency lender that was last valued at more than $3 billion, froze all withdrawals and transfers due to “extreme market conditions.” Celsius is an interest-bearing cryptocurrency product – one of many that have grown popular in the past years. The issue with these cryptocurrency lending products is that they are not regulated like a bank. For example, according to Celsius’s Terms of Use, “In the event that Celsius becomes bankrupt, enters liquidation, or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable…”

Some believe the fallout of failed cryptocurrency projects are a good thing for the sector overall — a stress test to wash out business model flaws – and that once global market conditions get better, cryptocurrencies will see a price increase.

Regulators, on the other hand, will continue to focus on protecting consumers from unregulated and highly volatile investment products. They have already started to crack down on interest-bearing cryptocurrency products. States such as New Jersey and Texas targeted Celsius last year, alleging that its interest-bearing accounts are equivalent to an unregistered securities offering.


Political and Regulatory Agencies Take Action on Crypto Matters

Conversations continue within the industry, politicians, and regulators on strategies to regulate digital assets for consumer and market safety, without stifling the innovative spirit of the industry. 

  • President Biden signed an Executive Order on ensuring responsible development of digital assets—outlining the first whole-of-government strategy to protect consumers, financial stability, and national security, and address climate risks.
  • The Office of the Comptroller of the Currency (OCC) issued a consent order on a crypto platform with a national trust bank charter, homing in on the platform’s Know-Your-Customer compliance and anti-money laundering practices. The consent order mandates the crypto platform to cease such practices, remediate their practices, and onboard new hires skilled in compliance. Acting Comptroller of the Currency Michael J. Hsu stated, “The OCC holds all nationally chartered banks to the same high standards, whether they engage in traditional or novel activities.”
  • A prominent Decentralized Finance (DeFi) developer coined the phrase “regulated crypto” as he proposed for cryptocurrency businesses to apply for permission to operate under national blockchain frameworks rather than focusing on policing the industry through more comprehensive cryptocurrency regulation.
  • In April, Senator Pat Toomey (R-PA) released a draft of the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act (Stablecoin TRUST Act). The draft focuses on defining “payment stablecoin” as redeemable for fiat currency and its backing limited to assets that are cash and cash equivalents or Level 1 high-quality liquid assets denominated in US dollars. Interestingly, the draft does not mention audit and mandates that the Securities Exchange Act do not consider payment stablecoins from its term “security,” which would keep payment stablecoins from the oversight of the US Securities and Exchange Commission.


DeFi on the Forefront of Cryptocurrency Security Concerns

The industry is noting that crypto-hackers are holding money looted from cryptocurrency platforms. Public digital ledgers make it difficult for crypto-hackers to spend or launder stolen funding without the use of mixers like Tornado Cash, a system in which individuals deposit cryptocurrency and “mix” the cryptocurrency with others. Regardless of these difficulties, illicit activity has continued to make the front pages of cryptocurrency news.

  • Hackers stole up to $1.57 billion of cryptocurrency through the first four months of 2022, already surpassing 2021’s total value hacked.
  • The second-biggest cryptocurrency hack ever occurred in late March, with $600 million in Ethereum and USD coins stolen from a gaming non-fungible token (NFT) blockchain.
  • 97% of all cryptocurrency hacks that occurred in Q1 of 2022 were on DeFi protocols, typically in response to faulty code that allowed hackers to identify vulnerable avenues for illicit activity (an easier avenue compared to a private key-protected wallet).

DeFi on the Forefront of Cryptocurrency Security Concerns


Digital Asset and Financial Institution Synergy Plan for the Future

Mergers and acquisitions and strategic partnership growth continued in 2022 Q2, including the largest non-Special Purpose Acquisition Company (SPAC) deal in cryptocurrency to date.

  • The Depository Trust & Clearing Corporation is partnering with a non-profit “Digital Dollar Project,” with the goal of providing clearing services for a US Central Bank Digital Currencies (CBDC). This news came after President Biden directed the Federal Reserve and the US Treasury Department to investigate the potential implementation of a US CBDC.
  • Fintech giant FIS partners with NYDIG to provide greater accessibility to Bitcoin for its clients. NYDIG’s value proposition is in providing Bitcoin through their integrative platform. This investment by FIS, which has a vast market share in the fintech transaction space, will ease the transferability of Bitcoin in client transactions and aid banking clients in responding to an increase in demand.
  • Fintech Bolt, a company focused on one-click mobile payments for shoppers, acquired crypto-firm Wyre for $1.5 billion, the largest non-SPAC acquisition in crypto sector to date.
  • Venture capital (VC) investment in protocols (crypto, NFT, DeFi), reached a quarterly high in Q1 and is expected to continue to climb. While digital assets enter bear market territory, VC firms are enticed by protocol-based companies as they look forward to the future.


Cryptocurrency Products and Services Reach Out to Consumers

Both in response to and in hope of further consumer adoption, financial institutions aspire to make cryptocurrency products and services readily accessible to the everyday consumer. 

  • JPMC to invest in Viva Wallet—In January, JPMorgan Chase announced that it had entered into an agreement with Viva Wallet to acquire an ownership stake of approximately 49%. Viva Wallet is a European cloud-based payments fintech company with a proprietary cloud-based payments platform that offers a broad array of services to merchants, including tap to device technology, merchant cash advance, bill pay, expense management, virtual debit card issuance, cash disbursement, gift cards, and loyalty. 
  • Gemini Credit Card—In January 2021, Gemini, a cryptocurrency platform to buy, sell, and store cryptocurrency, acquired fintech startup Blockrize to help launch a credit card allowing users to earn rewards in cryptocurrency. A little over a year later, Gemini launched the Gemini Credit Card. Card owners can make purchases where Mastercard is accepted and earn up to 3% in cryptocurrency rewards (in the form of Bitcoin, Ethereum, or any other cryptocurrency available on Gemini). The rewards are instantly deposited into the user’s Gemini account. Gemini Credit Card has already seen more than 500,000 customers register for the card.
  • Goldman Offers Bitcoin-Backed Loan—In April, Goldman offered its first-ever Bitcoin-backed loan. The terms of the lending have not been disclosed, but a Goldman spokeswoman stated, “We recently extended a secured lending facility where we lent fiat [cash] collateralized on Bitcoin; Bitcoin being owned by the borrower. The interesting piece for us was the structure and the 24/7/365 risk management.”
  • Fidelity’s New 401(k) Offering will Invest in Bitcoin—In April, Fidelity, the nation’s largest provider of 401(k) plans, said that it would enable its participants to put a slice of their retirement money into Bitcoin—if their employers allow it.


US Adoption—While Rising—Lags Behind Other Countries

As of late April, the United States ranks 8th of 150+ countries in overall crypto adoption, a decrease from its previous 6th-place ranking.

  • Nearly 25 million Americans own Bitcoin as of May 25th, 2022.
  • According to PEW Research, as of late April 2022, roughly 16% of Americans have traded or invested in crypto.
  • The top 5 Cryptocurrencies in the US are Bitcoin, Ethereum, Dogecoin, Solana, and Ripple, in that order. Bitcoin has a large market share, coming in at ~45% (compare to Ethereum’s ~14% share).


International Cryptocurrency Considerations and Activity

Nations are continuing to fold cryptocurrency and digital asset standards and considerations into their domestic codifications.

  • In May, France financial regulators granted Binance a digital asset service provider license, allowing one of the world’s largest crypto exchanges to operate its trading platform, facilitate digital asset custody, and facilitate user buying and selling of cryptocurrency in France.
  • In April, Kazakhstan’s Ministry of Digital Development codified registration and reporting guidelines for cryptocurrency miners. The order mandates cryptocurrency miners to register and report company names, physical and IP addresses, contact information for certain cases, expected power usage, hardware requirements, and other data fields. The cryptocurrency miners will be expected to provide quarterly updates on this information.
  • The Australian Prudential Regulation Authority (APRA) has released risk management expectations for regulated institutions handling crypto-assets along with a policy roadmap spanning the next three years. The APRA plans to emphasize due diligence and risk assessment requirements. The roadmap includes plans to publish operational risk standards by 2024. The Australian Tax Office noted a 63% increase in taxpayer digital asset transactions in 2021 compared to 2020.
  • The European Commission received approximately 10,000 public comments in response to its call for feedback in potentially establishing and regulating a central bank digital currency, or digital euro. The feedback will hopefully assist the European Commission in considering user needs, the digital euro’s potential role in retail payments, anti-money laundering rules, privacy and data protection, and more.


The Spread of CBDC

  • More than 80 countries (accounting for approximately 90% of global GDP) have at least started researching, developing, piloting, or launching CBDCs. 
  • Nine countries, including Nigeria, the Bahamas, and the Eastern Caribbean, have launched full-scale CBDCs, while 15 other countries such as Ukraine, Sweden, and South Africa, are piloting CBDCs.
  • The United States continues to debate the benefits and risks of a CBDC, including potential benefits such as faster payments and minimal credit and liquidity risk, and potential risks such as a potential hindrance on commercial banking operations.
  • The Central Republic of Africa joined El Salvador as the second country to adopt Bitcoin as a legal tender in April of 2022.


What the Luminaries are Saying

"The proliferation of mainstream financial institution cryptocurrency products and services demonstrates consumer demand. Provided these platforms continue to build consumer trust and convenience, we can expect adoption acceleration to continue." — Reed Luhtanen Executive Director of U.S. Faster Payments Council

Bitcoin is the only economic entity where supply isn't affected by demand.”— Investor Bill Miller

It’s probably easier and cheaper to counterfeit hundred-dollar bills than it is to counterfeit Bitcoin.”— Naval Ravikant, co-founder and former CEO of AngelList

Bitcoin is absolutely the Wild West of finance, and thank goodness. It represents a whole legion of adventurers and entrepreneurs, of risk takers, inventors, and problem solvers. It is the frontier. Huge amounts of wealth will be created and destroyed as this new landscape is mapped out.”— Erik Voorhees, founder and CEO of ShapeShift

Bitcoin is a technological tour de force.”— Bill Gates, founder of Microsoft


Related Press Coverage

  • ‘Our rules have to evolve’: The crypto industry is trapped in regulatory purgatory (Fortune)
  • The SEC’s Fight With Coinbase Has Massive Ramifications For The Market (cardano feed)
  • Bitcoin is back on center stage (Protocol)
  • The crypto crash is bad news for ransomware criminals (Protocol)
  • Coinbase has little to lose in confronting the SEC (Protocol)
  • 5 top crypto scams to watch in 2022 (U.S. News)
  • 5 top crypto scams to watch in 2022 (WTOP)
  • A Law Firm Is Seeking Disgruntled Bored Ape Yacht Club Investors for a Class Action Suit Alleging Yuga Labs Overpromised on Returns (artnet)


Special thanks to Shantel Silva, Mark Leprine and Jared Sanderson for contributing to this article.

Alma Angotti, Partner

Jonathan Shiery, Partner

Let Us Help Guide You

Complexity demands a trusted guide with the unique expertise and cross-sector versatility to deliver unwavering success. We work with organizations across regulated commercial and public sectors to catalyze transformation and pioneer new directions for the future.

Stay ahead of the curve with news, insights and updates from Guidehouse about issues relevant to your organization and its work.