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Why The Regulation Alone Is Capable To Develop Digital Asset Markets

12 November 2018 19:29, UTC
Oleg Koldayev, Alina Belkovskaya

The digital assets market will not rest forever, and it’s for two reasons; we will analyze them sequentially. The first reason is that the need for new financial instruments is too grand since classical means of payment have to a large extent exhausted their development potential. This trend can be traced both in the macroeconomic interaction of countries and in the daily life of consumers of financial services.

The global trend in changing the economic preferences of the society can be traced in one simple example. According to the survey of Facebook, 92% of young people in the United States do not trust traditional banking institutions and services. At the same time, 68% are convinced that credit institutions do not understand and do not want to understand their needs, and 45% are already ready to use modern FinTech solutions in their daily lives. In other words, even in Western society, a steady demand for the alternative economy has developed that is better integrated with a rapidly changing way of life.

The digital market could not but react to the change of social priorities. We talked with Nikolay SHKILEV, the investor, the business consultant, and the expert in the digital economy, on how global trends will develop.

NS: The market has been falling for a long time, but this negative wave has significant and, in general, positive consequences. It has washed small investors, “projectors”, and plain speculators away from the market. Now, it is entered by large financial investment companies that have billions of dollars and dozens of successful projects. They are not subject to psychological influence, this herd behaviour, which is now commonly called hype. Accordingly, digital startups are evaluated in a new way: romantic ICOs are losing popularity because large investors need serious cases where there are logic, well-developed strategies, and qualified teams. Yes, they are willing to invest in new projects that fit their understanding of business relationships. The era of ideas and sites being made quickly and dirty is over.

This tendency affects not only the digital but also the global financial market. The index of KBW Nasdaq Financial Technology FinTech Companies reached its maximum in August of this year - 1,716 points and it already surpasses S&P 500 in growth rates.

Moreover, the main event of 2019 in the digital currency market will be the arrival of one of the largest financial companies - Fidelity Investments. $3.9 trillion of exchange and non-exchange assets are currently managed by the operator, and at the moment, the holding is ranked 4th in the world ranking of financial companies, giving way only to BlackRock, Vanguard Group, and State Street Global. The attention of such giants should stimulate the crypto-market‘s growth.

However, the expected rise may have an unusual vector: a new melt-up of the value of bitcoin may not happen, but the market will grow, and new stable assets will appear on it. Nikolay Shkilev thinks so. The time of exchange-tokens is coming to an end, and digital assets secured by any tangible values are entering the picture:

NS: Today, the popularity of various stablecoins is growing noticeably. There is an interesting example: a coin secured by whiskey has recently appeared on the market. Nobody believed in it, but it suddenly began to grow quickly, and it turned out that the cost of whiskey had increased by 25% over the past 10 years and continued to increase. Thus, the asset has snowballed the coin. In other words, the digital market greatly pushes the boundaries of opportunities for the investor, allows him to look at those segments of the global market that he hasn’t even thought about before.”

And now we have come to the second reason for the possible growth of the digital economy, which is due to geo-economic factors. Many states want to get rid of dollar dependence and get out of the economic control of the United States.

Superpower reasons and ambitions destroy the space of trust in the business ecosystem, and as an inevitable consequence, there are as many as three trade wars in the world: the US vs China, the US vs Iran, and the US vs Turkey, each of which has geopolitical rather than economic reasons. The White House has already introduced duties in the amount of $200 billion on goods from China, and from next year, it plans to increase fees by another $250 billion. And not only the Celestial Empire itself but the entire region will go negative: Taiwan (-1.9% of GDP), Malaysia (-1.3%), and Hong Kong (-0.9%). The US GDP will lose 0.66% because of the tit-for-tat sanctions of China.

On the one hand, the traditional global economy is more and more like a cage with moraines, where everyone is trying to destroy each other. On the other hand, such a turn of the situation offers both big risks and new opportunities for countries that are not beneficiaries of the existing financial system. The relative security of digital assets from political manipulation makes them economically attractive, which is natural: business prefers to distance itself from the financial institutions controlled by the government. No wonder it is growing at an incredible speed in Southeast Asia.

NS: Many of my colleagues admit that they have long been tired of the US-dependent SWIFT and as for the dollar system - it’s uncomfortable for businesses to be in a situation where the channel for financial flows can be cut at any time for political reasons. For example, on the wave of the thaw in the relations between the US and Iran, many European companies have invested in the economy of the Islamic Republic, and what is the result? The country was disconnected from the global payment system and the business suffered huge losses.

Russia could become one of the driving forces of the new economy, but the authorities are in no hurry to use the country's economic and intellectual potential, even though the digital market is relatively free from US political influence. According to a number of experts, Russia has very successfully coped with the program of import substitution and has relatively stabilized the economy, and now could master a large segment of the virtual assets market. To do this, it needs to fulfill only one stipulation: to create specific documents and regulations that define the frameworks of legality for digital projects, in particular, and the vector of development of the industry, in general.

This is not happening. Explaining the legislative frost, most experts mention the same reason: legislators do not have a clear understanding of the legal nature of digital assets, their use in economic relations, and their role in public life. However, behind the loosely closed doors of economic forums, there are other versions: the development of the country's digital market is unprofitable for someone in Russia until he decides what role he wants to play in it, and this someone occupies the position that is too important in near-government circles, and is one of the most important - in the financial sector of the state.

It is the decision of this person that puts the breaks on the inflow of potential investments in the digital assets industry, while Russia could take the place of Malta and Singapore, having made a serious economic breakthrough.

NS: I’ve recently been in Malta and I was lucky to communicate with the top officials of the state - the president and the prime minister, and the dialogue held with the leaders on such a high level is an indication of the special attitude of the state authorities to new financial institutions, their readiness for progress. Moreover, the search for common understanding between the business community and the government is a mutual process. The business has appreciated the friendly environment: last year, 4,000 people came to the blockchain summit, and this year - 8,500 already, almost every second is ready to start a business or launch a startup there.

But Malta is a small country, an island with slender resources. The potential of Russia is much higher. My colleagues from China, Japan, and France often ask me when Russia will finally open its market for cryptocurrencies and blockchain.

Today, the volume of trading in the market of virtual assets is $5 trillion per year, only Binance trades $5 billion per day. For comparison, with our main market partner - Germany, Russia annually conducts transactions only for $50 billion. $5 billion a day and $50 billion a year - feel the difference and lost profits too.

In addition, Russia has another indisputable advantage: the proficit of electricity. Many regions produce 10-20% more than they consume, and some 50% more. Among the countries with developed infrastructure, the Russian Federation has the cheapest electricity, and it could be partially spent on the production and circulation of digital coins.

Legalization of the digital business can renovate the financial atmosphere in the country, bring revenues to the budget, and allow the business community of Russia to legally build a promising business without losing intellectual and human capital.

NS: I see that immigrants from Russia stand behind almost every large and successful international FinTech project. I will not give examples, because anti-Russian prejudice in the West is not a myth. But at the same time, Russian investors and technical specialists are not in a hurry to return to their homeland, because they have given up on the possibility to realize their projects: all their efforts come across resistance from the powerful conservative financial and banking lobby in the government, in the legislative bodies, and in business. And those who remain hinge on the enthusiasm and patriotism.

The main driving force of the successful development of any economy is the effective realization of human capital in the global market. China is a vivid example: in 25 years, it has been able to turn from an agrarian depressed country into the second largest economy of the world. Refusing to modernize now means losing the future of our country for at least a quarter of a century ahead, which is happening in Russia now.

No matter how much the crypto-market strives to remain uncontrolled, it is the regulation of the rules of conduct in a given territory that gives companies the opportunity to turn into truly supranational and strong brands.