What has been happening around Blockchain Technology and Cryptocurrencies this week? The most relevant local and international developments as well as appealing background reports in a pointed and compact way in retrospect in our weekly review.
Last week, carmaker Tesla announced that it would no longer accept Bitcoin as a means of payment due to climate concerns. Accordingly, the cryptocurrency's energy consumption became more of an issue and was partly responsible for this week's sell-off. Galaxy Digital, one of the leading digital asset managers, published a report on the topic. The authors calculated the actual energy consumption of the network and its impact on the environment. Additionally, a comparison was made to the estimated energy consumption of the banking system as well as the mining operations related to gold. However, the interpretation of the data finally depends on the worldview of the observer. For the advocates of "digital gold", the high energy consumption is justified. After all, a globally accessible payment and value storage network requires energy. For opponents of Bitcoin however, every gram of CO2 is too much, as in their view the cryptocurrency serves no tangible purpose. The discussion about the resource consumption of "proof of work" payment networks is likely to continue in the future.
Prominent U.S. investment banks such as JPMorgan, Goldman Sachs, and Morgan Stanley have started offering investment solutions for clients involving cryptocurrencies. In most cases, the offering is limited to qualified investors and the entry to the digital assets happens through funds. Wells Fargo, a financial services firm with nearly $2 trillion in assets under management, is joining its peers. The investment division plans to offer an actively managed cryptocurrency strategy for wealthy clients. The driving factor, according to the financial institution, was increasing regulatory clarity and adoption. Cryptocurrencies have also been able to hold their ground as an uncorrelated asset for an extended period of time. For now, access remains limited to a managed fund for high-net-worth clients. Should a U.S. bitcoin ETF be approved in the future, the bank may consider expanding to a broader client base.
In China, organizations close to the government are trying to ban services for cryptocurrencies. There were several similar announcements already in the past, which were ultimately not implemented or reversed. Now, trading and settlement of cryptocurrencies by financial institutions is to be strictly regulated or banned again. While the legal framework around cryptocurrencies remains fuzzy, the focus of the Chinese central bank is on its own central bank digital currency (CBDC). Internationally, several central banks are working on pilot projects, but China's digital yuan is the most advanced. A test phase has already been launched in several major cities.
Central bank digital currencies (CBDCs) are a dominant subject on a global level. The U.S. Federal Reserve has already expressed its views on the matter in the past and is pursuing a project to create and issue digital dollars. This week, Fed President Jerome Powell announced the roadmap ahead. According to the statement, a detailed report from the central bank weighing the pros and cons of a digitally issued currency will be released this summer. CBDCs give central banks new tools for fiscal policy and monitoring money flows. As a result, a CBDC is definitely of interest to Powell, but a broad range of opinions would need to be gathered before a definitive decision is made. The report to be published this summer should lay the groundwork for the follow-up.
In addition: Interest rates have been falling worldwide for decades, in some countries even into negative territory. Nevertheless, hundreds of millions of people remain excluded from credit markets because lending is done by financial institutions and they maintain a restrictive lending policy. Decentralized credit markets on the Ethereum blockchain are designed to address this shortcoming. DeFi protocols are accessible 24/7 and allow anyone to borrow cryptocurrencies or earn returns on deposits. The potential has meanwhile attracted the interest of traditional financial institutions as well.
Selected articles in the weekly review:
Galaxy Digital has published a report on Bitcoin's energy consumption.
The major bank is enabling selected customers to gain access on digital assets.
Some organizations in China are seeking a ban on cryptocurrencies.
The central bank is pursuing the introduction of a digital dollar.
Decentralized credit markets on the Ethereum blockchain are attracting institutional interest.
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