Two Worlds Colliding: Touchdown for Crypto – Superbowl Underscores Consumer Interest

On February 13, 2022, for nearly 60 seconds, a colorful QR code bounced across a black screen on over 100 million streaming screens during a commercial break of the Super Bowl broadcast.

The QR code was an incredibly successful advertisement by Coinbase.  So many viewers scanned the QR code, that the cryptocurrency exchange platform’s mobile application momentarily crashed trying to keep up with the increased traffic.

Coinbase’s advertisement during one of the country’s most widely watched broadcasts is indicative of a push to bring cryptocurrency mainstream and drive adoption, and potentially the success in doing so.  In fact, this year’s Super Bowl was dubbed the “Crypto Bowl” by the Wall Street Journal in response to this year’s team of cryptocurrency advertisers looking to purchase commercial slots. Even further, the National Football League (NFL) offered limited edition non-fungible tokens (NFT) to celebrate Super Bowl LVI.

This is perhaps not a surprise, given the adoption rates and transaction volumes over the past 12 months. In 2021, Bitcoin alone had an annual settlement volume that surpassed that of Visa’s at $13.1 trillion.

While cryptocurrency exposure and adoption rise, politicians and regulators still debate regulatory concerns. Policymakers continue to study risk areas such as price volatility consumer protection, financial crime, or cybersecurity. 

In the fifth 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.

Political Discussions and Regulatory Action on Crypto Matters

While US politicians gather to continue to discuss cryptocurrency and digital assets, regulators have been active in crypto matters.

• On February 8, 2022, the US House of Representatives’ House Financial Services Committee held a hearing entitled, “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins.” The hearing comes after the US Treasury’s report on stablecoin risk and request for new regulation.
• On January 27, 2022, the Securities and Exchange Commission (SEC) rejected a spot Bitcoin exchange-traded fund (ETF) proposal from a well-known investment giant, raising concerns that the proposal has not met requirements for preventing fraud, manipulation, and investor protection.
• A cryptocurrency exchange affiliate received approval from the Financial Industry Regulatory Authority (FINRA) to operate an SEC-registered broker-dealer. The approval will allow the cryptocurrency exchange affiliate to operate an alternative trading system and trade digital asset securities.
• An enterprise blockchain firm has brought on former chair of the US Commodity Futures Trading Commission (CFTC) J. Christopher Giancarlo to its board of directors. The former CFTC chair is expected to advise on strategic initiatives relating to asset tokenization and distributed ledger technology. 
• Leading House Financial Services Committee Republican, Patrick McHenry (R-NC), stated that crypto requirements should not be ceded to regulators such as the SEC or CFTC, and that the House Financial Services Committee should appropriately categorize these assets and crypto-governance rules. McHenry made these remarks to urge the House to work together to encourage digital assets to flourish. 
• A blockchain-based prediction market platform has settled with the CFTC, agreeing to pay $1.4 million and to cease and desist offering access to trading certain markets. The settlement was for “offering off-exchange event-based binary options contracts and failure to obtain designation as a designated contract market or registration as a swap execution facility.”
• A cryptocurrency exchange agreed to pay $100 million in penalties to the SEC on February 14. The cryptocurrency exchange failed to register as securities, retail crypto lending offers and sales.  In a “first-of-its-kind” action, the SEC charged the cryptocurrency exchange with violating registration requirements within the Investment Company Act of 1940.  

Illicit Activity Remains a Crypto Concern

Illicit activity stole more than $14 billion in cryptocurrency funds in 2021. Despite the $14 billion stolen being the all-time high value stolen on record, it was also the all-time low in share of all cryptocurrency activity.

• The fourth-largest centralized cryptocurrency exchange, Crypto.com, was hacked in January, resulting in a loss of over $15 million in the cryptocurrency Ethereum. In response, the company pursued proactive multi-factor authentication implementation and fully refunded all impacted parties after the incident. 
• A crypto-wallet holder had $50,000 in funds in 2018 within their wallet. After forgetting their PIN, the wallet holder lost almost all the funds in the wallet. As of late January 2022, that investment was worth more than $2 million. The holder hired a crypto hacker to recover the “lost” wallet. The hacker was able recover the PIN and pull the $2 million out, demonstrating persistent and legitimate security concerns regarding crypto wallets.
• Money laundering through illicit transactions in DeFi rose 20x and almost 2,000% in value in 2021. Cryptocurrency money laundering rose 30% in 2021, with Bitcoin being the industry’s most targeted cryptocurrency for money launderers, likely due to its large transaction volume. 
• Despite news of recent criminal activity on cryptocurrency transactions—a 2021 Chainalysis report estimated that criminal activity represented 0.34% of cryptocurrency activity in 2020. Conversely, the United Nations estimated that 2%-5% of global GDP annually is connected to illicit activity, indicating that criminal activity using cryptocurrency may occur at a lower rate proportion than with fiat currency.

Digital Assets Enable Strategic Synergies

As firms attempt to become more scalable and competitive in the digital asset space, strategic M&A and partnerships emerge. 

• The crypto industry recognized a total of $6.1 billion in M&A transactions throughout 2021. The 197 M&A transactions that occurred in 2021 is a growth of over 131% YoY.
• Coinbase purchased FairX, an online trading platform, to provide greater exposure to less accessible markets, including the derivatives and future markets cryptocurrency trades.
• In January 2022, two boutique investment banking firms located in California merged with the goal of becoming the go-to crypto advisory firm for financing and M&A transactions.
• WonderFi, a decentralized cryptocurrency from Canada, acquired the first Canadian regulated crypto marketplace for $208 million, Bitbuy. Bitbuy offers institutional and individual clients an exchange trading platform. The business combination is expected to result in a more scalable and end-to-end cryptocurrency business model for both parties.

Cryptocurrency Innovation and Creativity Brings Cryptocurrency into the Mainstream

While investment in cryptocurrency continues to grow, the innovation in cryptocurrency and digital assets are exposing US consumers to crypto-products and services through avenues outside “traditional” investing mechanisms as well.

• Similar to New York City Mayor Eric Adams, Miami Mayor Francis X. Suarez, NFL player Odell Beckham Jr., and more are requesting to be paid at least partly in cryptocurrency, CEO of Defi Nimbus suggests that play-to-earn mechanisms will serve as a catalyst for consumer adoption.
• Adoption of NFTs has driven overall exposure to Defi. In the past year, the NFT market has reached $23 billion in volume. Adidas has earned more than $22 million from its “Into the Metaverse” NFTs.
• Celebrities continue to cash in on the NFT hype. Canadian pop-star Justin Bieber bought a Bored Ape NFT for $1.29 Million in January, Gary Vee made over $90 million in 90 days selling hand-drawn cartoons as NFTs, and American Digital Artist Beeple sold an NFT for $69 Million at Christie’s – making him among the top three most valuable living artists.

International Activity Highlights Universal Cryptocurrency Concerns and Considerations

International cryptocurrency and digital asset activity highlight overarching global considerations and concerns, such as investor protection, environmental impact, and cybersecurity.

• The United Kingdom’s HM Treasury released its plan for regulating crypto-advertising. The HM Treasury has expressed wariness that the average consumer does not have an adequate understanding of associated risks with crypto-trading. The United Kingdom (UK) aims to add qualifying crypto assets to the list of controlled investments under the Financial Promotion Order (along with security tokens).
• In the UK, its marketing regulator, the Advertising Standards Authority, banned two advertisements from Crypto.com in response to a complaint over possible misinterpretation of the advertisements’ contents and a failure from the advertisements to illustrate the risks of crypto investment. Crypto.com plans to release new marketing that goes “above and beyond” the regulator’s requirements.
• Russia’s President Vladimir Putin is reportedly endorsing regulations for the crypto-mining in the country to limit crypto-mining to regions with excess electricity supply.
• In a January 25 announcement, International Monetary Fund (IMF) executives urged El Salvador to remove Bitcoin’s determination as legal tender. The IMF pointed to “large risks” to financial stability, financial integrity, consumer protection, fiscal contingent liabilities, and Bitcoin-backed bonds. Additionally, users of El Salvador’s Chivo wallet have been reporting numerous issues such as unauthorized charges, failed transactions, and scam attacks.
• Pakistan’s Federal Investigation Agency issued an inquiry to Binance as part of an ongoing criminal investigation involving the use of Binance wallets and applications to defraud approximately $100 million from Pakistani users.

Emerging Cryptocurrency Products and Services 

New product and service offerings intend to make cryptocurrency easily accessible and desirable. 

• JPMorgan opened its Onyx lounge in Decentraland (one of the more popular metaverses), in time with its white paper reporting that the metaverse may bring $1 trillion in annual revenue and “limitless” opportunities.
• Polytrade was awarded Best Financial Institution of the Year by the Governor of Maharashtra, India for its work bringing “safe and insurance-backed” assets to the crypto world. Polytrade is a DeFi stablecoin lending protocol that seeks to help businesses in developing economies by bringing them into the DeFi space and tokenizing invoices. Polytrade is the first bridge between DeFi and TradFi.
• Companies invested in blockchain technology and digital infrastructure for their supply chain to eventually replace paper invoicing. Through the institution of smart contracts as a digital method of recording the acceptance for the shipment of a product, firms have discovered a way to automate payment for shipments and other supply chain costs. 
• Five FDIC-insured banks announced the launch of the USDF Consortium on January 12. The group is formed with the aspiration of networking banks to facilitate the adoption of USDF, a bank-minted stablecoin. 
• The SEC approved a blockchain-based securities exchange, BSTX. This is the first-of-its-kind fully automated exchange that is approved by the SEC and conducts operations through blockchain technology.
• Community banks are beginning to offer cryptocurrency trading capabilities through standard mobile banking applications.
• LooksRare Company has created a service by which users can trade NFTs and earn cryptocurrency for doing so, incentivizing the purchase and sale of NFTs.
• LooksRare and other crypto-based companies have provided “Airdrops” of free cryptocurrency tokens based upon the user’s prior precedent purchase of NFTs, cryptocurrencies, or other next-generation digital assets. 

Cryptocurrency Consumer Complaints

Guidehouse will be watching to see whether consumer complaints submitted to the Consumer Financial Protection Bureau against popular cryptocurrency companies will be reported at similar rates as 2021.

• As of the date of this article’s publication, consumer complaints targeting popular cryptocurrency companies are approximately 63% fewer than reported consumer complaints in Q1 2021.

Recent consumer complaints are tagged to issues such as funds being unavailable when promised, confusing or missing disclosures, managing mobile wallets, and issues completing transactions.

What the Luminaries Are Saying

• “Not to sound too dramatic, but DeFi is still a giant virtual laboratory of experiments where moving fast and breaking things in the world of finance is still the rule. The level of complexity of new DeFi services built-in "Lego" mode allows more room for either malicious attacks or human error.”—Ouriel Ohayon, CEO of crypto wallet ZenGo
• "It's up and down, day to day, week to week. You don't want to be trading this [crypto] on a short time frame…it's more of a buy-and-hold investment."—Jesse Powell, CEO of cryptocurrency exchange Kraken 
• "[Bitcoin] is disgusting and contrary to the interest of civilization…[China’s] right to step out, step hard on booms, and to not let them go too far."—Vice chairman of Berkshire Hathaway, Charlie Munger, regarding requesting more extreme regulatory measures
• "We will see even more crypto companies going public in 2022 than we saw in 2021 and several of them will have valuations of more than $5 billion."—Arcane Research, a blockchain analytics firm 
• “There are real similarities between right now and where the internet was in 1999… but this is going to make the web look like small potatoes. The web co-ordinates information and data, but crypto revolutionizes the whole economic system."—Jeremy Allaire, founder and chief executive of Allaire Corporation, a computer software company