Many people are aware of primary cryptocurrencies, such as Bitcoin and Ethereum, which are now considered acceptable forms of payment and a store of value.
However, the ever-evolving depth and breadth of the crypto market is much larger than that. Cryptocurrencies now impact numerous sectors including finance, art, tech, as well as ecommerce, and could already be influencing your market.
Understanding the unique characteristics and nuances, including the regulations that guide their use, can allow entrepreneurs to identify unique business opportunities and gain an edge.
Let's get started:
1. Cryptocurrencies - BTC / ETH / LTC
Over the last few years, cryptocurrencies have gradually served as an alternative medium of exchange, particularly Bitcoin [BTC] and Ethereum [ETH]. Nowadays, more vendors are beginning to accept cryptocurrencies as a form of payment in exchange for goods and services.
Although these digital assets have risen in popularity, most legal systems around the world are still catching up to provide an effective framework for regulating this technology. As of now, creating a business around cryptocurrencies may require Money Services Business licenses to effectuate transactions and transfers legally. Similarly, holding, brokering or providing advisory services in relation to cryptocurrencies likely require additional licenses from the appropriate authorities. Depending on how you receive the currency and use it, there are also potential nuanced tax considerations.
Primary Markets Impacted: Credit Institutions, Financial Intermediaries, Payment Processors, Central Banking
2. Non-Fungible Tokens - Art, Collectibles, Membership Tokens, Music, Charity, Coupons, Revenue Sharing, Fractional Ownership
NFTs are non-interchangeable digital assets that are stored on a blockchain. They contain unique ID codes and metadata that distinguish them from one another. Thus, unlike cryptocurrencies, each NFT is unique and irreplaceable, making it impossible for one NFT to be equal to another.
Primarily based on Ethereum's network, but replicated on most major blockchains, the NFT market has a vast use case. The purpose of an NFT depends entirely on how the issuer deems it must be managed. For example, a 1 of 1 digital art piece sale operates differently than NFTs for song royalties or those that provide excess GPU power. Since 2017, NFTs have been used for a wide variety of purposes including digital artwork, real estate, video game collectibles, domain names, and much more!
Primary Markets Impacted: Arts, Entertainment, Intellectual Property, & any market where the middleman takes a large cut of proceeds.
3. DAOs/Governance Tokens - Constitution DAO, JuiceBoxDAO, KrauseHouseDAO
A Decentralized Autonomous Organization [DAO] is a smart contract-run entity whose decision-making command is spread out over a group of token holders. Membership itself is determined by the ownership of the DAO’s governance token. Usually, the weight of a member’s vote correlates to the number of tokens held. The 'group' decisions are then responsible for determining what can and cannot be done with the organization’s assets like hiring and firing, logo/color changes and investment of funds.
Governance Tokens operate much like traditional securities and issuers must understand their responsibilities. In the past, they have been used for everything from trying to buy the US Constitution to an entire NBA team.
Primary Markets Impacted: Traditional Partnerships, Investments Funds and Co-ops, Corporate Legal Services
4. Protocol Tokens - Solana, Cardano
Protocol tokens are cryptocurrencies that are required to access services provided by an underlying blockchain protocol. For example, blockchain platforms such as Ethereum, Solana, and Cardano, all have their own protocol tokens that are used to access various services offered through these platforms.
Previously, protocol layers were used freely and improved on and developed by enthusiasts or non-profit entities. For example, the TCP/IP protocol is behind the internet, yet most value from the internet was being derived by applications on top of this protocol layer (e.g. Facebook and Google). Despite being integral to the process, the underlying protocol layer hasn’t produced much economic value.
Now, blockchain and cryptocurrencies have brought with them a method of data decentralization and monetization. Therefore, protocol layers can now be monetized as well as track the value that it is creating. For example, the SOL coin completely derives its value from the Solana blockchain platform. If developers want to exploit Solana’s throughput and scalability capabilities, they will need to use SOL coins to access the platform’s features. The more SOL coins are used to develop decentralized applications on top of the blockchain platform, the more value is created by the Solana blockchain.
Thus, protocol tokens facilitate development and value creation relating to their underlying blockchain protocols.
Primary Markets Impacted: Internet Browsers, Accounting Firms, Information Aggregators
5. Exchange Tokens - Binance Coin, FTX Token
Cryptocurrency exchanges are platforms that are used to buy, sell, and exchange cryptocurrencies and tokens. They often include “exchange tokens” which are digital assets that are native to the exchange. Exchange tokens are usually designed to benefit both the traders and the exchange in various ways. For example, exchange tokens can help establish trust between users and regulators. The “Gemini Dollar” is a perfect representation of this, as it helps bridge the gap between traditional finance and blockchain ecosystems.
In addition, one of the main use cases for exchange tokens is to enhance liquidity. Crypto exchanges can incentivize traders to bring more activity into crypto markets by rewarding them for using their exchange token in transactions. Another common way exchanges boost liquidity is by offering traders exchange tokens proportional to their total trading volume.
Based on both centralized and decentralized exchanges, these tokens can be used to facilitate trade, provide trading discounts, and reward valuable customers. They are a great way to incentivize communities, raise funds for an exchange and/or manage liquidity on platforms.
Primary Markets Impacted: Trading Applications, Gambling Websites, P2P Networks
6. Security Tokens - Synthetix, Polymath
Tied to real world assets and sometimes traditional stocks, these tokens use the power of blockchain transactions to move a portion or the whole transaction of an asset into the crypto world. Anything from Tesla shares, private company stock or the deed of a house could essentially be moved.
When the general public is involved in these trades, they are certainly heavily regulated and thus, all parties involved need to be properly registered—from issues to exchanges to purchases—to abide by the full suite of securities regulations.
Primary Markets Impacted: Stock Markets & Exchanges
7. Stablecoins - Asset backed or algorithmic - USDT, USDC, BUSD, DAI
Pegged anywhere from 1 to 1 with the currency it is aiming to represent or holding a basket of goods within it to represent the value of 1 USD, the Stablecoin market is quickly becoming one of the most heavily regulated cryptocurrency markets.
A stablecoin is usually a cryptocurrency that is pegged to a “stable” reserve asset like the USD or gold. Stablecoins possess characteristics that make mass adoption more likely. For example, they are designed to reduce price volatility compared to unpegged cryptocurrencies like Bitcoin. Price stability allows the coin to overcome price volatility issues, which make stablecoins more attractive to risk-averse investors. Therefore, stablecoins represent a form of digital money that is better suited for handling day-to-day business transactions and money transfers.
Similarly, algorithmic stablecoins attempt to achieve price stability through an algorithm. These mathematical cryptocurrencies are designed to either issue more coins when prices increase, or purchase coins off the market when prices fall. It is undecided whether these algo-based currencies can survive the diversity of market conditions. They need to be thoroughly researched and offer true price stability if you are planning to run a business around these coins. A great example of an algo stablecoin is the MakerDAO’s DAI coin.
On the other hand, the greater potential for mass adoption brought forward by stablecoins also means that there are greater AML/CFT concerns with this type of cryptocurrency. The FATF Guidance on Crypto recommends that where an entity is proposing to create or use a stablecoin, an assessment of the AML/CFT risks and mitigation of said risks should form part of the licensing or registration process. It is also recommended that crypto entities and financial institutions that use stablecoins should be supervised in the same manner as those that involve themselves with crypto and other financial assets.
In summary, stablecoins have risen in popularity as they attempt to offer the best of both worlds. They aim to provide the instant processing and security/privacy of payments of cryptocurrencies while simultaneously offering the volatility-free stable valuations of fiat currencies.
Primary Markets Impacted: Central & Traditional Banks
8. Central Bank Digital Currencies – CBDCs
As financial technology continues to evolve, central banks around the world are considering the prospect of crypto and blockchain technology as well. More specifically, central banks are looking to issue their own “central bank digital currency” (CBDC). Many countries are currently in the process of developing CBDCs, and some have already started implementing them.
CBDCs are digital currencies issued by a nation’s central bank that would be pegged to the value of that country’s fiat currency. Ideally, CBDCs would be designed to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. This novel digital currency could also provide benefits to national governments as it could significantly simplify the maintenance of complex financial systems. Other benefits that could be provided by an effective CBDC include reduced cross-border transactions costs, zero credit and liquidity risks, and greater financial inclusion.
On the other hand, issuing a CBDC could have major unforeseen consequences on a country’s financial system. It is not exactly known how a CBDC could affect a country’s household expenses, investments, banking reserves, interest rates, or financial services sector. Similarly, introducing this new technology creates uncertainties in relation to a central bank’s ability to effectively implement monetary policy.
Despite these risks, The US Federal Reserve Board recently released a discussion paper exploring the possibility of implementing a US CBDC. The paper states that a CBDC would be the safest digital asset available and that it could facilitate access to digital payments, allow for rapid and cost-effective payment of taxes, and promote access to credit. However, given the risks involved, the Federal Reserve indicated that additional steps towards developing a CBDC will only proceed if there is support from the executive branch, Congress, and the broader US public.
In summary, central banks around the world see potential in being able to issue money directly to citizens. Working with these assets will clearly become a big business for traditional FinTech players ready to play by the rules.
Primary Markets Impacted: P2P Currencies, Traditional Lending Institutions
9. Natural Asset Tokens - Veridium, Climatecoin, MCO2
Tied to real world assets, such as carbon, biodiverse environments or other positive ecological traits, these tokens can be used by companies and owners to either offer their natural assets or buy them for companies in need.
The carbon market is the fastest growing area in this space and could become a large player in the overall fight against climate change.
A clean BTC, recently minted from a solar electric-powered machine, can be sold to a natural gas producer in need of carbon credits. As a result, this opens a world of possibility in Web3.0+Earth2.0 finance.
Valuing natural assets, such as a diverse tropical forest compared to a single asset such as carbon, is trickier and less economically clear; however, this could be a game changer that the world has yet to realize. Natural Asset Tokens could potentially keep natural assets in the ground and support local communities that exist on these lands.
Primary Markets Impacted: Carbon off-set markets, Traditional extractive industries
If any of these sectors resonate with your business, you may benefit from entering or learning more about these markets. Renno & Co has worked with companies in all sectors mentioned above. We are ready to scope out the business use case, ensure all regulations are well understood and help you capture the market opportunity ahead.