Cryptocurrencies are the new money paradigm. They promise to simplify the existing financial architecture to make it faster and cheaper, but the absence of clear regulation leaves the door open to fraud, speculation and instability.
“Despite the losses generated by major cryptocurrencies in recent months, the crypto market is set to grow. In fact, 2023 will even see an increasing number of traditional financial institutions offering cryptocurrency products and services.”
Over the past few years, the total market capitalisation of all cryptocurrencies has grown significantly: according to CoinMarketCap (2023), this value has increased from around $19.5 billion in January 2017 to $2.5 trillion in 2022, and the figure is expected to reach $10 trillion by this year. An astonishing growth when you consider that in 2017 this value was just $100 million and there were 800 different cryptocurrencies. By 2021 there were already 8,000 and by 2023 it is estimated that there will be more than 20,000 different currencies (2022 Global State of Crypto, Gemini).
Currently, Bitcoin remains the world’s most expensive currency (worth 429 billion), although ‘by 2023 we expect its dominance to fall even below 50 per cent’, the authors state. Among the most valuable cryptos are Ethereum (EUR 189 billion) and Tether (EUR 66.5 billion), which remain among the major ones despite the difficulties in 2022. Bitcon lost more than 60 per cent of its value, Ethereum 64 per cent, and overall, there is a more than 90 per cent drop in the value of the other major cryptocurrencies.
The use of cryptocurrencies in Italy and Europe continues to grow. According to Chainanalysis, cryptocurrencies worth more than USD 1,300 billion were moved in Europe between July 2021 and June 2022, confirming the importance of the Old Continent in investments in digital currencies.
According to Chainalysis, Italy is the sixth most active European country in crypto movements and 51st in the world, behind the UK (17th), Germany (21st), France (32nd), Spain (34th) and Portugal (38th). The most popular cryptocurrencies for Italians are Bitcoin, Ethereum and Dogecoin.
The investment in crypto in Italy is mainly in the gaming and NFT sectors, which together account for 30% of virtual currency traffic. NFTs are a special type of cryptographic token, unique and non-interchangeable, particularly used in money laundering. Indeed, according to research conducted by Elliptic (2022), as of 2017 there were over $8 million in illicit funds laundered through NFT-based platforms, worth over $100 million between 2021 and 2022 alone globally.
Currently, there is no international consensus on the regulation of cryptocurrencies, but governments around the world are moving not only to develop clear rules, but also to create their own digital currencies themselves.
In China, the government has been testing a digital version of the yuan since 2021, which is increasingly being used domestically. In contrast, the digital dollar, by the US Federal Reserve, and the digital euro designed by the European Central Bank are still in the development phase. While the development of cryptocurrencies issued by central banks could have significant benefits, it could also create challenges for the large-scale cryptocurrency market. Indeed, the authors claim regulation is a double-edged sword for companies operating in this sector: more regulation could reduce their room for manoeuvre, but also provide more stability and legitimacy to the market, helping to attract more institutional and retail investors.
Indeed, a digital currency issued by a central bank has multiple advantages. For Mancini, this cryptocurrency ‘would be able to act as a medium of exchange, unit of account and store of value in an era when cash is becoming less and less relevant. It could also help financial institutions reduce the costs associated with handling physical cash and increase the transparency of transactions’.
In addition, more regulation would also reduce crime and money laundering through crypto exchanges. According to Chainalysis’ Crypto Crime report (2023), hundreds of illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022, an increase of +68% compared to 2021.
Not only malfeasance but instability, and the FTX case proves it: a major cryptocurrency exchange platform that collapsed for a few days in 2022, causing an unprecedented disaster in the market and undermining the confidence not only of investors but even criminals. The total darknet market turnover for 2022 was $1.5 billion, a reduction of almost 50 per cent from $3.1 billion in 2021 (Chainalysis, 2023).
“Due to the risks associated with their use, the current macroeconomic environment tends to view cryptocurrencies more as an alternative asset than a true substitute for fiat currencies issued by central banks. Instability, rather than rules and sanctions are currently the real Achilles’ heel of crypto: a financial instrument with enormous potential and capable of building an empire, but also of collapsing like a house of cards after a mere blow,’ Villadei concludes.