In 2021, Crypto Got Ready for Its Closeup

The biggest story of cryptocurrency this year is that it went mainstream.

The best studies show that about 13% to 14% of Americans now own or have owned cryptocurrencies. Mainstream news outlets are (mostly) covering bitcoin in the business and markets section rather than the crime report. Politicians are fighting over it. And big institutional investors like hedge funds are investing in it.

Then there’s the government view. Treasury Secretary Janet Yellen was asked about bitcoin at her confirmation hearing. Republicans and Democrats are staking out positions on how strictly to regulate it. Securities and Exchange Commission (SEC) Chairman Gary Gensler — an expert who taught crypto at MIT before joining the agency — has called it the “Wild West.”

Bitcoin and ether saw their prices skyrocket, even accounting for a steep post-bull crash in November. Bitcoin’s market capitalization hit $1 trillion in February, $2 trillion in August and $3 trillion (briefly) in November, when bitcoin’s price neared $68,800. Ether, which started the year at about $750, is ending it close to $4,000. Institutional investors dove in as bitcoin became increasingly seen as a crypto in a category of its own: an inflation-hedging store of value, like gold.

Here’s a look at 10 of the biggest crypto stories of 2021.

DeFi Moves to Center Stage

At the beginning of the year, there was about $25 billion invested (locked) into decentralized finance (DeFi) projects, such as decentralized exchanges (DEXs) and lending/borrowing platforms. Now it’s $100 billion. It made headlines in The New York Times when Massachusetts Sen. Elizabeth Warren called it “the most dangerous part of the crypto world.”

Stablecoins Create a Stir

Dollar-pegged cryptocurrency stablecoins may not be an entirely new topic this year — Facebook’s June 2019 Libra (now Deim) project saw to that and the widespread fear among regulators, central bankers and elected officials that they could endanger monetary sovereignty and the world’s financial system. But they are getting more and more important and prominent, as a five-hour stablecoin hearing before the Senate Banking Committee showed. Then there’s the money. The market cap of the top five stablecoins — Tether, UDS Coin, Binance USD, Terra USD, and Dai — is $152 billion.

And there’s a storm coming in 2022 when elected officials grasp that No. 7 stablecoin Paxos’ just-announced deal to be a currency for payment — instantly and to anyone, anywhere — on Facebook’s 2 billion customer WhatsApp messaging service is Libra by another name.

World Economies Eye CBDCs

Central bank digital currencies (CBDCs) are at the heart of the coming payments revolution. It’s not clear if CBDCs, stablecoins or traditional financial institutions’ real-time payments projects will bring real-time payments to both back-end and consumer transaction. Whichever wins, real-time payments are coming.

It’s hard to unwrap them from China. The digital yuan is out of the testing phase, and it looks like China will meet its goal of having a live CBDC in time for the Winter Olympics in Beijing this February. It is the first country to have a CBDC — the Bahamanian Sand Dollar took that honor. But China’s digital asset is lighting fires under finance ministries around the world, with 87 countries, including the European Union, looking. The fear is that the digital dollar will give China a tool to challenge the dollar’s role as the world’s reserve currency. However, the U.S. is still exploring the idea of a digital dollar, and neither Yellen nor Federal Reserve Chairman Jerome Powell are convinced of the necessity — or urgency.

China Moves Crypto’s Center of Gravity

Two points. First, the digital yuan is forcing a payments revolution (see CBDCs above). Second, by banning crypto trading and mining outright, China moved crypto’s center of gravity — and highly-polluting bitcoin mining operations — squarely to the U.S. It also removed 1.4 billion buyers from the market. Between that, the Great Firewall and extensive internet censorship, the ban will likely hold.

NFTs Go Mainstream

The nonfungible token (NFT) soared into the mainstream of both crypto and the general public this year, to the point that NFTs — along with DeFi — are slowing Ethereum to a crawl. A type of cryptocurrency token that can permanently lock data like images, music and even video into a format that can prove its own provenance is making inroads into art and gaming and could be used to tokenize everything from stocks to real estate.

The $69 million NFT collage that artist Beeple sold at Christie’s in May kicked off mainstream interest, but professional sports — notably basketball and soccer — have jumped in with both feet, offering digital trading cards and loyalty building efforts, like allowing fans to vote on team decisions.

Coinbase Goes Public

When U.S. cryptocurrency exchange Coinbase launched its IDO — an initial direct offering, similar to an initial public offering (IPO) but without financial middlemen — on Nasdaq in April, it became the first crypto industry firm to go public without sneaking in via a reverse merger. That was a sea change, showing that crypto was a “real” and legitimate industry.

Bitcoin Gains Legitimacy with ETFs

Launching bitcoin exchange-traded funds (ETFs) is another phase that the industry as a whole sees as step toward legitimacy. That’s in large part because the SEC won’t permit them as it believes that cryptocurrency trading is still far too manipulated and manipulatable. So, the October decision to license bitcoin futures ETFs was a big step, but still short of the legitimacy that a spot ETF would bring.

Regulatory Battle Lines Drawn

Regulation of crypto is coming. On that, pretty much everyone agrees. After that, however, there are a lot of disputes, but the two biggest are all about control.

First, there’s the shape of regulation. That pits the crypto industry’s desire for a light touch regime aimed at nurturing innovation (shared by a fair number of Republican congressmembers) against many regulators’ desire for a stricter regime aimed more at protecting consumers (shared by a fair number of Democratic congressmembers). So, there’s a partisan battle brewing, with Sen. Cynthia Lummis on one side and lately Warren on the other.

Second, there’s the power struggle among regulators. This mirrors the first to an extent, pitting the SEC against the Commodity Futures Trading Commission (CFTC). Gensler’s recent call for a single crypto regulator — say, his agency — is matched by CFTC Chairman Rostin Behnam’s suggestion that congress expand his agency’s authority. It’s more than a power struggle. SEC control would support the view that virtually all cryptocurrencies are securities — investments, rather than commodities. The latter would make a lot more utility tokens used to run decentralized applications (DApps), platforms and blockchains a whole lot easier to sell and manage. The SEC’s ongoing lawsuit against international payments firm Ripple for selling securities — XRP tokens — without a license could settle the dispute in the courts if congress doesn’t act.

Big Banks Embrace Crypto

OK, embrace may be a strong word, but major banks and other financial institutions (FIs) are starting to offer crypto investments to wealthy customers — who are demanding it — while getting serious themselves about custody and using stablecoins, CBDCs or some other form of cryptocurrency (like Ripple’s XRP) for real-time, back-end settlement of all kinds of transactions. Long gone are the days of banks shutting the account of any customer who sent money to an exchange account.

A Little Story About Jack and Elon

No look back at crypto in 2021 would be complete without the stories of Tesla and SpaceX CEO Elon Musk and Block (and formerly Twitter) CEO Jack Dorsey.

Dorsey has become a louder and prouder advocate of bitcoin and blockchain technology. A bitcoin maximalist, he just said he thinks bitcoin will replace the U.S. dollar. Block’s Cash App was the first major non-industry payments app to offer crypto trading, and it’s a huge part of the company’s profit. He’s also a big believer in decentralized technology, funding a project — BlueSky — to create an open-source, social media platform that can’t be censored. And that whole stepping-down-as-Twitter-CEO thing started when an activist hedge fund complained that Twitter’s substandard results stemmed from Dorsey spending too much time and attention on Block (formerly Square).

And then we have Musk. A crypto advocate who bought $1.5 billion in bitcoin for Tesla’s corporate treasury, he also became — very briefly — the first CEO of a major corporation to sell goods for bitcoin. Alas, Tesla’s embrace was fleeting, something he blamed on the staggering environmental impact of bitcoin mining.

Then there’s his Twitter account, which currently has 66 million followers. Musk delights in moving the market with subtle comments and memes, and he’s done it very effectively with bitcoin. But it’s Dogecoin where he truly shines. The joke cryptocurrency — literally, it was designed as a joke — has grown from virtually valueless to the No. 12 cryptocurrency by market cap. “Lion King” memes and things like buying some for his son and declaring him the first “toddler HODLer” have caused DOGE to skyrocket. Of course, a “Saturday Night Live” skit tanked the price. What’s clear is that by and large, Dogecoin essentially is Musk.