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March 2018	Citi GPS: Global Perspectives & Solutions

Chapter D: Digital Assets

Cryptocurrencies have created a market buzz in recent months, with 2017 arguably the year of cryptocurrencies in popular culture. Prices of bitcoins increased 14x in 2017, Ethereum 100x and Ripple 350x (albeit the latter two started from a lower base price) – driven by rising retail investor interest, especially in Asia and America; significant global media coverage; increasing institutional involvement including CBOE / CME bitcoin futures; and increased digital token sales, amongst others.

Total market capitalization of all crypto combined scaled $660 billion in 2017 and despite price fluctuations in 2018, stands at $450 billion in March 2018. This chapter looks at – Why cryptocurrencies matter? What is the market share of major cryptocoins? Where are they traded? Rising regulatory issues? And also importantly we look at the major applications in the financial sector of the underlying blockchain technology.

The first question around cryptocurrencies is whether they should be defined as a currency or a commodity. Regulators and market experts remain divided on whether cryptocurrencies should be treated as a currency or commodity.

As the SEC Chairman Jay Clayton noted on December 11, 2017 – "Simply calling something a "currency" or a currency-based product does not mean that it is not a security .... It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC's jurisdiction. Whether that assertion proves correct with respect to any digital asset ... will depend on the characteristics and use of that particular asset." (link to statement).

A currency is classically defined as:

1.Unit of Account – provides a unit of measurement to define, record and compare values.

Due to rapid appreciation and high volatility cryptocurrencies are obviously unreliable as a unit of account over a period of time. Importantly, the so-called ‘kimchi premium’, as well as other smaller but persistent valuation mismatches between exchanges, makes them poor units of measurement to define, record and compare values.

2.Medium of Exchange – represents a standard of value which is acceptable by all parties and exchangeable for goods and services.

Cryptocurrencies can be used for this purpose worldwide and have legal status in Japan. But, utility is low compared to the utility of the local fiat currency and charges for use are often high.

3.Store of Value – maintains its value without depreciating (can be saved, retrieved & exchanged at a later time with the expectation that it still has value).

Over a suitable period, major cryptocurrencies have historically been better than a store of value and have gained remarkably against fiat crosses. However, short-term volatility as well as large charges in conversion to-&-from fiat are challenges to this role, particularly if future gains are less spectacular.

© 2018 Citigroup