Thomas Campione, Blockchain & Crypto-assets Leader at PwC Luxembourg, talks to Silicon Luxembourg about crypto as a means of payment, some of its current shortcomings (volatility, energy consumption,..), and whether or not it makes sense for a state to introduce Bitcoin as a legal tender, among other things.
Thomas Campione, El Salvador recently made history by recognising Bitcoin as a legal tender. What do you think of such a move? Will Europe take a similar step?
I think it is a pretty bold decision. No one would have bet on such a move a few years ago, when Bitcoin was considered as a transactional means used on the dark web and for illicit activities.
This makes sense for countries like El Salvador, Venezuela or Argentina, which face high inflation and the consequences of having their currency’s performance pegged to the US dollar. It is somehow a way for them to reduce monetary dependence .
However, it seems difficult to imagine such a move in Europe where national regulators are still building their view on the broad crypto-assets topic, which is still perceived as a source of risks: risk of control loss over the monetary policy, risks for the countries’ sovereignty, to cite just two. That being said, there seems to be a clear willingness to offer a digital euro across the EU, as evidenced by the just-launched 24-month project on digital euro using DLT. The question is whether such currency will be compatible with Bitcoin.
The development of a Central Bank Digital Currency (CBDC) by the European Central Bank has several objectives. Combining the efficiency of a digital payment instrument with the safety of a central bank backed currency is one of them.
From your perspective, should a company start accepting cryptocurrency as a means of payment and why?
There is certainly more than one reason to bet on crypto-assets, the embracement of digital in all forms and shapes, being one of them. The impact of such a move on competitiveness, branding, attraction and retention of new customers, especially young and digital native clients who are acquainted with this kind of payment, should not be neglected.
However, the decision to use and/or accept crypto as a means of payment calls for a broader reflection around the necessary IT interface, operational considerations (including financial reporting and administrative processes) as well as user experience, to name a few.
The list doesn’t stop there, though. Further questions need to be addressed: Is there a demand and a need for the players across the whole value chain? How exposed to price fluctuations should companies be? And what infrastructure needs to be implemented and maintained, and how safe and secure will it be?
Better be well prepared.
Inherent volatility is often raised as a key argument against cryptos. What is your take on this?
Volatility is a relative concept and shall be appreciated in light of the nature of each asset class. For instance, while equities are more volatile than bonds, their return is higher, which is acceptable for everybody.
Moreover, volatility broadens the universe of investment opportunities and is essential to financial markets from that perspective. It is neither good nor bad, it is a financial market feature. Market timing is what really matters at the end of the day.
As with any asset class, those who invest in cryptos should consider their risk-adjusted return, namely, how much return one gets on a certain risk level rather than looking at volatility in isolation, which is meaningless. Then, one can compare the risk-adjusted return of cryptos with the ones of other more traditional asset classes, such as shares or real-estate investment and make informed decisions. After all, volatility associated with crypto or any other vehicle is neither a benefit nor a drawback.
However, crypto markets have had a hard time since the Bitcoin all-time-high. What is your view on the impact of recent global crypto prices news?
One reason to explain Bitcoin’s instability is how it has been traded. It has been mainly handled by retail investors for more than a decade, which is to say individuals who do not necessarily have the experience and expertise that institutional investors have.
This leads to biases, sudden reactions and sometimes confusion, when countries such as the US, China or India give opinions on any type of crypto-assets or, at individual level, or when influential people such as Elon Musk tweets contradictory messages.
There is indeed a huge discrepancy between the news and the noise. Furthermore, massive buy-and-sell movements affect the stop-loss market order, creating a waterfall on the investment markets which, in turn, increases the panic effect.
Professional investors have strategies and mid-term perspectives that ignore short-term moves. Therefore, the more institutional investors will invest in Bitcoin, the less volatile the market will be.
How do you see the situation in the coming months?
Since the situation has returned to normal, I don’t expect any other drop or increase in this quarter. I would expect an upward trend again in Q3 and Q4 2021, as big institutional investors continue stepping into the market.
Today, we see higher demand for new crypto-based investment vehicles but the existing offer is falling short. Since 1st of July, German funds and spezialfonds have started investing in cryptos, a move that will increase the demand even more.
As part of the current global crypto market capitalisation of $2.15TN, we consider that around $4 to $5 billion crypto are invested in hedge funds, and $45BN among cryptocurrency exchange traded products. Needless to say, we are at the very early stage of professionally managing crypto-assets and there is huge space for investors to step into this market.
Decentralised finance (DeFi) is becoming a thing. Could you explain what it is?
In very simple terms, DeFi refers to the provision of smart contract-based financial services without any centralised intermediaries, through distributed ledger technologies such as the blockchain.
The scope of services includes activities such as lending, borrowing, staking, yield farming, decentralised exchange, etc., and it is expanding very quickly. Indeed, the current DeFi crypto market capitalisation is about $86Bn as of 14 September.
DeFi is permissionless, innovative and inclusive: anyone with Internet access can benefit from these financial services, through a smart contract, and without the need for an intermediary or a central entity’s authorisation. Financial inclusion is, in this case, a key aspect to highlight.
You may have read about DeFI as the “Lego of financial services”; users can indeed choose the different bricks of the infrastructure they need and build their own set of services according to their own need. Decentralized finance is still at its early stage and remains a playground for innovation but it’s undeniably promising for future business.
However cautious is called when stepping into DeFI : indeed, as a fully smart contract-based environment, functional or security loopholes can cause significant and irreversible damages to users. As for any new and developing area, anyone wishing to step into DeFI should do proper due diligence before committing any amount of money into it.
You mentioned “decentralised exchange” activities. Can you develop?
Decentralised exchange is arguably the simplest form of Defi. Based on DLT, it’s a peer-to-peer interaction and crypto transaction between two people without any other agent or person involved, but with limited functionalities and protection.
An important point to note here is that there are neither KYC (Know Your Customer) nor AML (Anti-money Laundering) processes required at the moment to start interacting on a DEX. From that perspective, DeFi is bringing trust from a technology standpoint and ensuring that the transactions take place but gives no guarantee as to who the counterparty of your trade is.
Lastly, while the space is developing at a very high pace, it shall be noted that decentralised exchange allows for few trading possibilities only at the moment. Therefore, trading volumes and liquidity are relatively low compared to traditional crypto-exchanges.
Another famous argument against crypto is energy consumption. Could crypto be environmentally friendly?
Discussions about Bitcoin are very polarised and not without many misconceptions.
In fact, this energy consumption exists as part of the creation (mining) and transaction validation processes (through proof-of-work in the case of Bitcoin), and it is the flip-side of securing the network and the transactions happening amongst participants. However, it shall be noted that energy consumption is mainly channelled toward mining and more than 90% of the Bitcoins to ever be available have already been mined.
In addition, energy consumption and carbon footprint shall not be mixed up as they are two closely linked but different concepts.
Furthermore, the proof-of-work consensus mechanism of Bitcoin is only one of the many consensus mechanisms available out there and numerous low-energy consuming mechanisms already exist today (be it Proof-of-Stake, Proof-of-Authority or, even most interestingly, Proof-of-History in the case of the very promising Solana project)
Lasty, I think it is important to put things into perspective here and to look at relative energy consumption, for example by comparing the Bitcoin energy consumption with that of the traditional financial system as a whole. After all, Bitcoin is meant to be an alternative to it.
And to put things into perspective again, let’s keep in mind that sending a lunch request by email consumes the equivalent of 1 hour of a light bulb.
How do you see the evolution of blockchain and crypto-assets in Luxembourg?
We see a combination of market players, including regulators, public bodies and traditional actors who are maturing on crypto-related matters. At European level, the European Commission is also preparing the Markets in Crypto-Assets Regulation (MiCA) and I consider regulations as a form of legitimacy of crypto.
We also expect a significant rise in the development of projects and solutions from institutional players such as BNY, State Street, Fidelity, or Citibank to cite some who have already made their plans clear.
Hence, the structural dynamics is here. This leads to opportunities for the Luxembourg financial center, which could develop solid expertise and differentiate on crypto asset management, digital funding, tokenisation or DLT market infrastructure. We now need to make sure to seize these opportunities, by bringing regulatory clarity to market participants but also to embrace the topic at government level. In my opinion, it is critical for Luxembourg to make a move on the topic quickly, to ensure competitiveness in the long term.
I also expect the Blockchain to support the non-financial sector with new opportunities and key services such as assets and provenance tracking, supply chain finance, credentialisation.
And finally, I believe Blockchain and organisations pursuing sustainability and ESG goals will come closer. The technology could be leveraged as a trust machine, to trace and prove the real environmental impact of these organisations, for example, and ultimately augment trust amongst market participants.
