In this blog, Ralph Payne, Chief Financial Officer at Copper, and Naresh Aggarwal, Associate Director - Policy & Technical at the ACT, answer some of the questions posed by the audience during part one of our popular digital assets and cypro curriences educational webinar series.
Do you think we will see the emergence of a monetary union of cryptocurrencies using markets in emerging/frontier markets, e.g Salvador, Venezuela, Nigeria, ....?
Ralph: "Absolutely, I believe that we will soon see international associations made up of countries that are embracing digital assets to share knowledge, build collaborative initiatives and engage in advocacy for better regulation. I also think that recent events in the US, i.e the infrastructure bill and the Coinbase-SEC debacle, have further highlighted the need for our industry to launch well-organised lobbying – just like every other trillion-dollar sector."
Naresh: "I think the likelihood of monetary union using one or many cryptocurrencies is low. Monetary union provides significant benefits for the countries that operate it, but as we can see from the euro, the use of a single currency across different countries requires the loss of sovereignty in a number of important areas which can be electorally difficult to agree to.
If monetary union is considered from a public sector central bank, this is one of the pilots currently underway with a number of central banks (for example Project Dunbar).
If this is being considered from a private sector perspective (such as Diem), there are significant regulatory hurdles that would need to be passed.
Finally, the challenge with the use of cryptocurrencies is their adoption by citizens. Although I have not come across any specific research, individuals would need to be comfortable with a number of concepts such as:
Are NFTs (non-fungible token) the new ICOs (Initial Coin Offering)?
Ralph: "The NFT market certainly appears to be going through the same phase as the ICO boom in 2017 what with all the hype, money pouring in, and works selling for eye-popping sums (in August, a jpeg of a rock just sold for about $1.3m). I simultaneously hold the following views about the NFT space: Firstly, that this market is likely in a bubble – valuations are incredibly high and at some point we will see pull-backs. And secondly, we’re only just scratching the surface of this new industry. In recent months, we’ve seen a great deal of low-quality NFT projects come to market in hopes of making a quick buck. Now that the initial hype is subduing, people are becoming much more selective about which drops to participate in. I believe that a huge correction is on the cards and only after that will we likely start to see a solid use case for NFTs and its role in the future of the internet/development of Web 3.0."
Naresh: "This question could be answered in many different ways. There is a lot of interest in the market for NFTs and in this sense, they could be considered the new ICOs. However, from a practical perspective, ICOs relate to a fundraising process whereas an NFT relates to a specific item. Once a coin has been issued, it can no longer be considered an ICO whereas once an NFT, always an NFT!"
Do you expect the market to retrace 80-90% as it has done in the past? How does an institution position this?
Ralph: "Unlikely. Markets have changed significantly since the huge swings. While in 2017 retail expected institutions to come in, they didn’t. But 2020 and 2021 proved otherwise. And people are more aware of how to read market demand especially with supply dwindling on spot exchanges, where most large players would buy from. While institutions are not fully inside the crypto economy, the change is that they’re all gearing up with research arms specific to the space. They wouldn’t be investing time and resources in a space they thought was not valuable. But they’re still studying."
Appreciate digital assets can represent anything - however, it's been mentioned that to participate in owning a digital asset requires an underlying asset is required, which I take to mean a currency or other traditional asset. Is that correct?
Naresh: "It depends on what type of underlying asset is used to acquire the digital asset. Whether the underlying currency is a digital currency (such as bitcoin), a stablecoin (such as USDC) or a fiat currency (such as US dollars), the most important factor is that the medium of exchange used to acquire the digital asset is one that both parties to the transaction are comfortable (and capable) of transacting in."
Should the market be worried about so-called 'stablecoins'?
Naresh: "Depends on which market is being referred to. Stablecoins have the potential to affect the role of central bank money if citizens and businesses see them as interchangeable with public money. They could even threaten the role and importance of fiat money if they allow lower costs (for example for cross-border transactions) or allow greater use (such as through the application of smart contracts)."
Views on CBDCs
Ralph: "2021 has been the year interest in CBDCs took off, and the implementation of CBDCs is now a question of when, not if. Central Banks that succeed in CBDC development are presented with a unique opportunity to expand their influence and impact on both a regional and international level. In short, my view is that CBDCs that exist alongside cash, cryptocurrencies, and private payment solutions can play a critical role in our future global financial systems. The key concern with CBDCs is of course that central banks of oppressive regimes will try to leverage digital currencies to crush private payments companies or decentralised entities; they see CBDCs as direct access to piles of data on people’s spending habits."
Does Copper offer a multi-sig solution?
Ralph: "No. As part of our mission to remain synonymous with institutional-grade quality, last year Copper adopted a new cryptographic key management technology called multi-party computation, or MPC. Widely recognised as the most robust solution, MPC cryptography consists of encrypted key shards that are never reconstructed. Copper’s MPC offering differs from many of our competitors... we use sharding in such a way as to never keep a record of the shards belonging to the client and the trusted third party."
How do we record assets for balance sheet purposes?
Ralph: "This depends on two factors: (1) control and (2) form of the asset. For (1), where control is shared (in the case of Copper custody), the key is determining which party has a majority control over the asset(s) in question. Assets that can be controlled by a given entity must be reported by that entity. Once satisfied that the given entity controls the asset(s) in question, the form of the asset(s) must then be considered. For example, stablecoins (tokens valued and assured at 1:1 with a given crypto-asset, such as USDT or USDC) could be considered as cash on hand. They can be readily converted to their 1:1 cash equivalent and are already accepted in some commerce and retail settings. Other assets, such as BTC or ETH, are not assured with, or linked to, existing monetary standards and therefore have a more speculative underlying nature. Whilst they may be accepted in the same commerce or retail settings referred to above, they most certainly are not cash assets and are best classified as intangible assets. Intangible assets should be held at cost, with no reported increases in value unless realised (in which case gains are recognised in the profit or loss account). In the case that value decreases and is unrealised, the asset is to be impaired."
From an accounting perspective, how does Copper deal with exposure of digital assets from custody perspective for clients i.e. accounting on their balance sheet or off-balance sheet? And why?
Ralph: "Further to the above question, assets which Copper can control directly will be reported on the balance sheet as intangibles. The majority of Copper's assets, held under MPC custody where only one of three shards are in our possession, are not under Copper's sole control and are therefore off-balance sheet. These are reported on client balance sheets given de facto control even in the case they hold just one shard."
What is your forecast on when traditional corporate treasuries will start using DeFi products as widely as they use bank deposits now?
Ralph: "DeFi is still in its infancy so the infrastructure serving this industry still needs to be built out and the regulatory unknowns still need to be responded to before traditional corporate treasurers can seriously consider using these tools. All eyes are now on FATF turning their attention to DeFi with the October deadline looming. But the way I see it, DeFi complying with existing regulatory frameworks today is just as shortsighted as expecting the internet to be regulated by existing laws in the 90's. Regulation must catch up to the tech. Circling back to the question, I believe that corporate treasurers are now engaged in researching and focusing solely on understanding Bitcoin as a treasury reserve asset class. I think this will continue being the case for the next 3-5 years."
About the webinar series
The ACT presents a unique series of four webinars starting this September, in partnership with Arca and Copper, exploring digital assets and cryptocurrencies, guiding you on a journey to an in-depth understanding of the topic.
You can watch each webinar live on the day or on-demand post-webinar.
