Cryptocurrency continues to boom, but questions remain

Cryptocurrency boomed in 2021.

According to the cryptocurrency exchange platform Coinbase, the market grew by more than 250% annually as of Dec. 15. Long known for the leading currency Bitcoin, the market has diversified into more than 11,500 coins with various functions and uses.

While many investors see great potential in cryptocurrency, questions still surround the market, from its complexity to its volatility and lack of regulation. And while it has yet to take off as a mainstream form of currency, both in Arkansas and beyond, some authorities and investors see great potential for it moving forward.

‘THE DIGITAL CURRENCY OF THE INTERNET’
Cryptocurrencies — which belong to a broader group of assets utilizing blockchain technology known as crypto assets — are digital tokens exchanged via blockchain. This distributed database acts as a complex virtual ledger that can quickly and efficiently verify ownership of an asset while also ensuring secure and decentralized transactions.

“Cryptoassets were designed to be an online way to get around all the expenses of banks; completely peer to peer, no middleman, no banks, no government, no oversight, no fees, no delays,” said Carol Goforth, a law professor at the University of Arkansas who has become a leading scholar on the regulation of crypto assets. “It was designed originally to be a substitute for currency, where the government knows everything you’re doing.”

“It’s the digital currency of the internet,” said Chad Yoes of Bentonville, general partner at Centurion Crypto Fund 1.0, a digital currency fund that simplifies and provides easy access to crypto investing for accredited clients. “It’s a very complex market, and there are a lot of nuances with it.”

Cryptocurrencies and crypto assets serve a wide variety of uses, from currencies specifically for use in video games to broader utilization of blockchain technology that can monitor and provide transparency in areas such as supply chains. Goforth pointed to Walmart’s collaboration with IBM to work with farmers to track their products using blockchain technology.

“So if there is something that is contaminated, they can trace it quickly and safely and avoid throwing away food that is good while they quickly throw away anything that is tainted,” she said. “It took a couple of weeks to do it under conventional tracing methods and a handful of seconds to do it once we had everything on the blockchain.

“The uses are really only limited by human imagination and ingenuity,” she added. “And we’ve really only scratched the surface of what can be done.”

Crypto’s utility has attracted more than 100 million investors worldwide, but the lack of regulation carries risk. The Arkansas Securities Department  (ASD) views cryptocurrency as “a speculative investment for retail investors looking to purchase digital currency or derivative products to make a profit” and urges investors to exercise caution.

“The recent wild price fluctuations in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” ASD Commissioner Eric P. Munson said. “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”

‘NASCENT STAGES’
Yoes said cryptocurrency is still in its “nascent stages” of use in Arkansas and has yet to be used as a widespread form of payment. The lack of service is partly due to crypto owners holding their tokens instead of selling or trading them and cryptocurrency’s general price volatility, creating instability in using it as a payment for services.

Currently, the Arkansas Securities Department does not plan to accept cryptocurrency as a mode of payment due to that volatility. But Yoes said there are stable cryptos from which to choose.

“If that was your fear, both on the merchant and consumer side, there are coins you could be in that are much more stable and less volatile,” Yoes said.

For crypto to proliferate as an actual currency instead of simply a commodity, Yoes said vendors will have to “grow tired of paying merchant fees to a credit card company.

“They’re going to realize, ‘Wait a minute, I can save 3.5% by using this token,’” he said.

NON-FUNGIBLE TOKENS
While blockchain technology is currently used in different ways across the state, crypto assets themselves have yet to see any widespread use in Arkansas. One area that may see adoption soon is non-fungible tokens (NFT), which uses the blockchain to represent ownership of real-world items such as music, art and other media.

According to Yoes, the technology has a practical use, specifically in areas such as ticketing.

“The NFT market’s most practical use is to verify ownership and authorship,” Yoes said. “So if you had something where you wanted to prevent some sort of counterfeit asset — think tickets to a sporting event or concert — the venue can scan it and instantaneously determine if that’s a legitimate ticket or not.”

According to Kevin Trainor, senior associate athletics director for public relations at the University of Arkansas, the athletics department is exploring NFTs but has no immediate plans to adopt the technology.

“We are reviewing its position and outlook in the industry, its various applications, and its stance at the conference level,” Trainor said. “However, I wouldn’t say something is imminent about that at this point. We are just looking into the space, as we do other emerging trends within the industry.”

REGULATORY RIGAMAROLE
According to Goforth, crypto assets face challenges that could threaten their proliferation in the coming years. The crypto market provides a new opportunity for money laundering and other financial crimes that have drawn the federal government’s attention. The new infrastructure bill expands tax reporting requirements for cryptocurrency transactions, requiring brokers to issue 1099-B forms to investors. And federal administrators, such as Federal Reserve Chairman Jerome Powell and SEC Chairman Gary Gensler, have expressed concerns regarding cryptocurrencies and have hinted at additional regulations.

But Goforth sees the regulations as vague and potentially stifling.

“We need clarification of regulatory structures and environments and making sure they’re balanced,” she said. “I understand the risk of fraud and criminal elements, but I’m not sure the regulators do more than give lip service to the reality that this is also a very exciting and potentially positive technological development that we need to avoid stifling. And I think the regulatory system we have right now is darn close to stifling innovation, and I hope that changes.”

As for the future, Goforth sees additional regulations being passed by Congress on stablecoins, which are cryptocurrencies tied to a more stable reserve asset such as the U.S. dollar or gold. She then sees government-backed digital currencies that will provide additional legitimacy to the market and draw in new users and investors.

Yoes, too, predicts the crypto asset market will continue to grow but sees the need for more simplicity and trust.

“Cryptocurrency will have to become simpler to explain and be accepted in faith,” Yoes said. “People have to have faith in the cryptocurrency and adopt it for widespread use. That comes from more users. At the end of the day, when it gets to a billion users, everybody will know it’s here to stay.”