Vol. 3: Social Impact of Cryptocurrency on the World
Despite existing for little more than a decade, the social impacts of cryptocurrency have already been widespread and profound. Thanks to blockchain, billions of people now know about and can access a new kind of electronic money. Decentralized finance (DeFi) has provided retail investors with access to a whole suite of financial and investment services which were previously the province of a select few. And looking beyond cryptocurrencies as a merely financial asset, trustless decentralized ledgers stand poised to revolutionize fields as diverse as logistics and law.
But every new technology comes with lofty claims about its impact. This edition of the CkSum Insight Series focused on ESG will present an overview of the tangible effects of cryptocurrency on society, and provide a glimpse of the social changes yet to come.
At the most abstract level, cryptocurrency has affected social change by raising awareness of decentralized approaches and the potential of blockchain and related technologies.
Technical understanding among users and investors is still low, but that’s not necessarily a problem. Not everyone needs to understand how infrastructure works, just what it does. The core ideas of cryptocurrency, particularly decentralization and self-sovereignty, have spread far and wide. Just knowing there’s another way to design, build, run, and participate in systems is a catalyst for development and change – even outside of crypto, where traditional industries and regulators are feeling pressure to be reactive and retain their positions of power.
The speed at which these ideas have disseminated has been extraordinary. In fact, there’s a case to be made that no technology has ever spread as quickly.
Despite being barely a decade old and highly technically complex, blockchain is now a familiar term the world over. And unlike similar claims to ubiquity, which are often limited to a tech bubble, this really seems to be true: the ideas represented by blockchain and cryptocurrency have penetrated every part of the world and every stratum of society.
It’s hard to measure memetic spread, but we can identify good proxy data. Headlines related to cryptocurrency in major publications exploded from just 2,500 in 2013 to over 90,000 in 2019.
Total cryptocurrency market caps, which hovered around $1bn for several years, soared in 2018 to almost $1tn and currently stand at over $2tn.
And this enthusiasm has spilled over to traditional markets: when cryptocurrency exchange Coinbase debuted on the stock exchange in June, it was valued at over $85 billion. All this points to an extraordinarily rapid and widespread penetration of the ideas behind cryptocurrency into society.
Tangible Impacts On Finance
But ideas aren’t the same as actual products and services, and even huge investment isn’t a surefire indicator of real value — it wouldn’t be the first time that a technology saw an explosion of interest but failed to meet the hype. And in some ways cryptocurrency has indeed been the victim of its own memetic success. Development is often piecemeal, and the tight link between price and utility inherent to tokenization exacerbates volatility and reduces the number of people actually using cryptocurrency for purchases and services. This was particularly true during the 2017 ICO boom, which resulted in the 2018 crash.
But we’re finally catching up, especially with DeFi. An entire ecosystem is springing up, providing global access to decentralized investment, exchange and lending services, in some cases for the first time.
Cryptocurrency and Finance
The most basic utility of cryptocurrency is as a way to send value from one place to another. It can be easy in developed countries to overlook the importance of this. When bank accounts and bank cards are commonplace, using cryptocurrency for payments and transfers can seem like an awkward gimmick. But this isn’t the norm for most of the world. The existence of a nearly globally accessible form of electronic money is an extraordinary development. In very low-income areas of the world, such as Africa, cryptocurrencies are offering a way to skip over traditional banking entirely.
Even the notorious volatility of cryptocurrency becomes less of an issue if your own currency is even more volatile – Bitcoin has been a huge boon to people in countries like Venezuela where currency is restricted and subject to hyperinflation.
One often overlooked use case is remittance payments. The UN estimates around 3.6% of the world’s population (281 million) people live and work away outside their home countries. Many support their families by sending home a portion of their salary via remittance services such as Western Union. In 2020, despite the pandemic, remittance flows to low- and middle-income countries stood at $540 billion according to The World Bank. These services are slow, expensive and can be difficult to access. Cryptocurrencies potentially address all three of these problems, which could transform the lives of millions of the world’s lowest earners.
Although the early ideal of everyone spending Bitcoin in shops still seems far off, recent developments have accelerated this possibility. As of September 7th 2021, Bitcoin is officially legal tender in El Salvador. El Salvador is a small country, and the decision has been met with scepticism and even hostility domestically, but the launch occurred in close collaboration with national banks, and this move could cut the Gordian knot of regulation which has plagued adoption in other jurisdictions. With international companies in El Salvador already accepting payment in Bitcoin, this may start a chain reaction in other countries and among global payment processors.
Beyond their application as currencies and tradable assets, the programmatic nature of some cryptocurrencies allows for a variety of investment, trading, and lending services, collected under the umbrella of decentralized finance (DeFi). This space is still in its infancy, but in a little over a year has blown through many valuation milestones. The excitement over a $100 billion valuation in April 2021 now seems slightly quaint, with current valuations for the sector standing at $1.5 trillion.
It would be naive to claim that DeFi and crypto can eliminate all the biases, imbalances and inequity which have long-plagued the financial sector — at a basic level, reliable access to an Internet connection is still a huge problem for billions across the world. Nonetheless, DeFi represents a huge leap forward in terms of global accessibility to financial services. These networks and services are a truly open playing field, available to anyone and everyone who can access them.
As with any technology, not all developments are positive. Cryptocurrency transactions have a reputation for being illicit, and that’s not entirely undeserved. Although fully untraceable cryptocurrencies are still a way off (most cryptocurrencies are pseudonymous, rather than anonymous, and even so-called privacy coins have proven susceptible to analysis via user metadata), the decentralized and automated nature of crypto has made it popular for illicit online marketplaces and cybercrime. Ransomware attacks are particularly notable for requesting cryptocurrency in exchange for unscrambling user data. According to ChainAnalysis, 7% of all funds received by crypto addresses in 2020 were ransomware payments.
However, the reality is that cryptocurrencies are also a useful tool in the fight against crime. Public blockchains are far easier to audit than other methods of transferring funds, especially across different jurisdictions. The permanence of the blockchain ledger is spurring a new wave of transparency, from criminals to legitimate businesses and government officials.
More worryingly from a global social perspective, crypto has been criticised for exacerbating wealth inequality. Despite the huge improvements in accessibility offered by cryptocurrencies, and the fact that many crypto projects claim to be motivated by resolving inequalities, data suggests wealth inequality is far more extreme within crypto than outside it.
This data is difficult to assess, since many of the addresses with the largest cryptocurrency holdings are controlled by centralized exchanges, and thus represent many thousands of individual users. Nonetheless, it’s unlikely this alone could account for the massive discrepancies on display.
The ease with which crypto allows assets to be transferred also opens up issues of tax avoidance. However, as with other illicit activity highlighted above, the highly auditable nature of blockchains makes it easier to identify perpetrators than through traditional tax avoidance methods. Indeed, it’s no surprise that the IRS is the largest customer of blockchain analysis firm CipherTrace.
Reaction from Regulators and Traditional Finance
The combined social impacts of cryptocurrency in the financial space – both positive and negative – is forcing traditional providers to adapt. This generally takes one of two forms:
- Integrating some part of cryptocurrency technology (often blockchain) into an existing industry.
- Reactionary moves to inhibit the usefulness of cryptocurrency and prevent expansion.
These two approaches often go hand-in-hand, especially at the national level. Almost 90% of central banks are investigating the option of issuing digital money alongside or as a replacement for their existing currency, with around 15% in an advanced pilot stage or beyond. Several smaller central bank digital currencies (CBDCs) have actually been launched in the Caribbean, with several larger CBDCs expected to go live in the next 12 months.
It’s unclear whether CBDCs will be able to displace cryptocurrency as the digital money of choice. In more authoritarian countries it is likely that regulators will aggressively favor CBDCs over their decentralized cousins. However, the existence of cryptocurrencies should hopefully pressure governments to ensure that CBDCs are a competitive and useful product, rather than a vehicle for control and restriction of user choice and privacy.
Cryptocurrencies are still mostly considered in terms of facilitating various types of financial transactions and services, but at their most abstract level blockchains are a tool for storing and verifying any kind of data. This ability to provide a trustless database and, in the case of smart contracts, perform decentralized computation stands poised to affect almost every sphere of human activity. Although limited progress has been made on these fronts, there are several areas worth keeping an eye on.
The pandemic has once again highlighted the fragility and inefficiency of supply chains, especially internationally. Freight forwarding, customs and logistics would all benefit from a trustless decentralized database which could streamline processes, improve auditability and aid in dispute resolution.
Despite the potential, progress on this front has been slow. In the ICO boom of 2018, automation and “eliminating middlemen” were key narratives, bringing a certain amount of over enthusiasm for this use case, with breathless pitches for systems that would use smart contracts to fully automate logistics and even the entire legal system. This fundamentally misunderstands the limitations of blockchains, which are only reliable insofar as you can be sure that the data on them can’t have been altered. Blockchains cannot verify whether the data was reliable in the first place, and smart contracts cannot execute real world outcomes.
Nonetheless, improved transparency and auditability without reliance on a trusted third party is still a huge step forward for many industries burdened by bureaucracy and incompatible systems spread across multiple jurisdictions.
Proof of Ownership, Identity, and Accreditation
More generally, blockchains can be a useful tool for proving ownership: of property, certification or even simply of one’s own identity. Citizens in developed countries often take these concepts for granted, but they all rely on third-party systems which must be trusted to be stable, affordable, and reliable.
Cryptographic concepts such as zero-knowledge proofs, which allow you to prove that you know a piece of information without revealing what the information itself is, are nudging companies and institutions towards a minimalistic approach, where users have control of their own data.
Many proof of ownership systems rely on a non-fungibility property: the creation of an ID tag which can be transferred but never deleted or duplicated. This is the same technology behind NFTs (which stands for non-fungible tokens). Current applications of NFTs may seem frivolous, but once the hype clears we’ll be left with a revolutionary way to handle ownership of non-financial assets. We’ll be looking into this more next time.
As always, CkSum’s investment approach is to diversify across all these promising new technologies, researching individual projects and choosing the best across a wide range. Not all of these potentially disruptive use cases for cryptocurrency will come to fruition, and the full impact is unlikely to be clear for years or even decades. But by taking a forward-looking approach and focusing on technical prowess rather than hype, we will catch the wave of innovation long before it crests.
The social component of ESG is often treated very narrowly, particularly within the US corporate environment. It’s particularly notable that cryptocurrency is the first wave of online technology not to be spearheaded by Silicon Valley. Crypto is a global technology with a global impact! At CkSum, we believe a huge part of its value is in the access and equality it brings to parts of the world, which are too-often omitted from these discussions.
Richard Sparrow - CIO/ Director
In addition to being the Chief Investment Oﬃcer for CkSum Capital, Ltd, Richard is a Vice President of Attribution at CipherTrace, Richard has spent the past 4 years building on Bitcoin and blockchain helping law enforcement, regulators, and the ﬁnancial industry understand how crypto is transforming industries. For the prior 20 years, Richard worked in the Silicon Valley providing mobile and ﬁntech infrastructure solutions for Amdocs, Deutsche Bank and Lending Tree, among others
Paul Wehner - Director
Since graduating from MIT with a Bachelors in Finance, Paul has been a serial entrepreneur specializing in ﬁnancial technology. He is the Co-Founder and Chief Product Oﬃcer of SFB Technologies, a venture-backed company selected to lead the development of the world’s ﬁrst decentralized legal tender, the SOV, for the Republic of the Marshall Islands. He also won the $100K First Place Prize at 2018 EOS Global Hackathon in Hong Kong for a decentralized identiﬁcation solution. Previously, Paul led Product Management for the eCommerce vertical of Endeca Technologies which was purchased by Oracle for $1.1 billion, and led development eﬀorts at MyLife, growing it from 0 to 250,000 monthly active users and an eventual acquisition by Meredith.
CkSum invests in a well-researched, diversified portfolio of cryptocurrencies and decentralized finance (DeFi) projects. CkSum follows a multi-stage investment process which includes identifying key, long-term industry trends, picking the best currencies, protocols and companies within those trends, and leveraging our holdings to generate increased returns through low-risk, high-yield staking and lending opportunities. We strive to provide an easy, safe, and reliable entry point into this revolutionary industry.
This material does not constitute an offer or solicitation to purchase an interest in CkSum Select Fund I, LLC or any related vehicle; such an offer will only be made via a confidential offering memorandum. An investment in the fund is speculative and subject to a risk of loss, including a risk of principal. There is no secondary market for interests in the fund and none is expected to develop. No assurance can be given that the fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the fund. These projections are included for illustrative purposes only and are inherently speculative, as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in the future. Returns for each investor and investment series will differ based on the timing of capital contributions. Please note, information above is subject to change; this is for general, illustrative purposes only.