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Is 2021 the year of crypto’s coming of age?

Blockdata co-founder Jonathan Knegtel thinks so. Almost a teenager, Bitcoin is reaching a level of maturity that’s defying the predictions of its critics.

The first Bitcoin futures exchange-traded fund made its debut on Wall Street just a little over a fortnight ago. Six days later, Mastercard partnered with digital asset management company Bakkt to bring cryptocurrencies into its network. As increasing numbers of mainstream finance sector businesses enter the crypto space, digital assets are reaching a level of maturity that’s defying the predictions of their critics.

“Blockchain, Bitcoin and cryptocurrencies are no longer some young, innovative technology,” Blockdata co-founder and managing director Jonathon Knegtel said in a video interview with Forkast.News. “It’s almost a teenager.” 

Moves by traditional finance sector players such as banks to integrate crypto with their existing products and services are giving the digital asset industry the momentum it needs to achieve critical mass in the mainstream, Knegtel explained.

“[Mastercard and Bakkt’s partnership is] making it a lot easier for people to actually enter the ecosystem and partake,” he said. “Because more users are coming in, the value goes up, and then the value gets circulated inside, and people start funding each other. And that's the stage we're at now.” 

Amid all this, crypto banks are emerging to further disrupt the banking system. These crypto banks — and digital asset businesses — resemble “challenger” banks such as PayPal and Revolut, providing crypto-focused financial services such as borrowing, lending and saving. If the previous wave of finance industry disruption was brought on by challenger banks, crypto banks appear to represent the next one. 

“Challenger banks definitely introduced the concept, but that means it's a lower jump for them to then jump to the next point and be exposed to crypto,” Knegtel said.

The crypto space has seen major growth in 2021. In the third quarter, blockchain companies raised US$6.5 billion, a 30% increase from the previous quarter, according to Blockdata. Half of the 20 biggest venture capital firms now have exposure to crypto exchanges, and institutional decentralized finance is expected to become a US$1 trillion industry.

The growth in the capital involved comes as blockchain companies reach critical mass and require larger fundraising rounds, which Knegtel believes is a sign that the crypto space is reaching maturity, although he also points out that the growth of the DeFi space remains minuscule compared to traditional finance.

“US$1 trillion is just 1% of the assets under management of the top 100 banks in the world,” he said. “One percent as a part of an asset diversification strategy in 2021 is not that much. And that alone would bring another US$1 trillion.”

Watch Knegtel’s full interview with Forkast.News Editor-in-Chief Angie Lau to learn more about crypto banks’ disruptive effects on the banking system, how regulation can propel the crypto space into maturity, how DeFi may challenge centralized crypto banks, and the risks behind the burgeoning market for non-fungible tokens.

Highlights

  • “Perpetual” growth in the crypto space: “When you take Bakkt, or you take any of these other … crypto services, it's making it a lot easier for people to actually enter the ecosystem and partake … And so that's just where the whole space then starts to become perpetual. ‘Perpetual’ is a word that I’ve started to use more and more when describing the ecosystem, because more users are coming in, and then the value goes up, and then the value kind of gets circulated inside and people start funding each other, and then that's the stage we're at now.”
  • Regulation and maturity: “Traditionally in this space, it's always been like, ‘No, regulation is bad. We don't want regulation.’ And I think the conversation is now turning a little bit to saying, ‘It's not that we don't want regulation. Specifically, we don't want bad regulation. Good regulation can be positive for the ecosystem, allows new opportunities, allows companies to mature and service more and more customers’.”
  • Crypto growth and the macro environment: “Inflation is now becoming a thing … A few years ago, everyone was like, ‘No, we want our current system, and it needs to stay the same, and we don't want anything new.’ And now it's starting to look like … investors are starting to educate themselves again. We've had a long period of education. Now they're realizing, ‘Hey, cryptocurrencies might not be the revolution, but they might be the evolution of the financial system.’ And if we're not placing a bet there, then we're actually betting against the system staying the same as it is now, which is pretty obviously not working very well in 2021.”
  • Why financial services businesses are entering the crypto space: “They realize … that this is becoming an evolution. It's just not going away ... But also … when we look at what's happening… institutional DeFi... and we look at a lot of the centralized providers, they provide institutional services that appease not only the front office ... but now the service level has gone up so much that the back office — traditionally the compliance guys who have said, ‘No, we cannot do this, this is not OK’ — they're now starting to be like, ‘Actually, if they're saying that and they have this and ... We can actually get involved in a regulated, compliant and — quote — risk-free environment’ — I put that in quotes because crypto still has inherent risks — ‘we can actually start to deploy capital.’”
  • Risks behind the NFT surge: “Just as quickly as people make money, people can also lose money. Or people get excited about NFTs, and then they put (them) on OpenSea, and then nothing happens. And then people can also lose interest in the technology or the idea that it represents because, hey, nothing happened. And so I think this circles a little bit around to regulation. For example, there's nowhere where you can register yourself as an NFT creator and you can get a stamp or maybe another NFT that proves your authenticity as an artist or what you're going to create — an audit of the code.”

Transcript

Angie Lau: Blockchain and crypto is this what mainstream looks like? How are crypto banks challenging challenger banks, and is DeFi an alternative or a replacement? 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It's what we cover right here on Forkast.News. 

I'm Editor-in-Chief Angie Lau.

This time last year, we asked a common question, and it went something like this: ‘When will crypto go mainstream?’ Well, today we have banks and regulators talking about Bitcoin. We've got major credit card providers gearing up to streamline crypto payments for commercial businesses, and major news organizations minting their own NFTs.

So we revisit the question once again: Is this what mainstream looks like? While this can be a subjective question that reciprocates a subjective answer, there's an objective way to deep-dive this question, and that's with data. 

Today, I'm joined by the co-founder and managing director of blockchain and distributed ledger technology market intelligence platform Blockdata. They track and verify data from over 10,000 blockchain and DLT firms. We welcome to the show Jonathan Knegtel. 

Jonathan, welcome to the show.

Jonathan Knegtel: Thanks a lot, Angie. It's a pleasure to be here and I'm looking forward to chatting about the future of blockchain. 

Lau: Yeah, I feel like I've known you since the very beginning when you started the company, and today you are a CB Insights company and driving the data and analysis on the ecosystem. You’re a data geek. I'm not as big of a data geek as you, but I can certainly appreciate the art form. But let's talk about it. Why is data so important in the space we cover?

Knegtel: Fundamentally, blockchain is all about data, data management, and single sources of truth. For people to actually adopt the technology and integrate it, they really need to understand it, and that’s where data forms the basis of that understanding. So what we were really trying to achieve is rather than everyone going and Googling and figuring it out and following Twitter, we just want to give people one dataset that allows them to be like, ‘Oh, this is really what's going on,’ so they can focus more on how to integrate the technology and less on trying to find out who's building it and who's working on it.

Lau: How much has the space changed since you started? When did you start and how far has this industry come?

Knegtel: We founded it just after the initial coin offering boom in 2017 — which was a hilarious time to start it — where we were looking at so many projects and just realizing, like, ‘Is this really happening?’ Then 2019 came along and the space got pretty quiet and we were like, ‘Well, what's the future of our company now?’ We kind of found it focused on cryptocurrencies.

And so that's when we started speaking to a lot of enterprises and realizing, ‘Hey, behind the scenes at these large organizations, there’s a lot more going on than meets the eye immediately.’ So we changed our dataset to accommodate both … cryptocurrencies and enterprise blockchain.

In terms of how it's actually progressed, I think that was the first stage of progression. And then what happened was, obviously 2020 came around, Covid came, it was like, ‘Yeah, what's the future of this industry going to be?’ And there was a lot of backtracking. Blockchain was just not on the agenda of a lot of people, not top-of-mind at all. And then slowly over 2020, everyone's online, everyone's moving. We started to see this uptick of activity that happens very, very slowly. DeFi kind of appeared on the scene. And when DeFi first came around, I was speaking to my friends and I was saying, ‘Is DeFi in its current state actually banking the unbanked? Or is this just another get-rich-quick scheme?’ And their answer was the latter.

And now, if we look at it as we progressed into 2021, we're now seeing this maturity starting to kick off. A lot of companies are making announcements. But if it wasn't for the ICO boom in 2017, moving into 2018, you could argue we wouldn't have the progression, the maturity that we see today. The amount of innovation in this space is almost impossible to keep up with. It's one of our biggest challenges.

Lau: I absolutely agree. We probably started talking in 2019 when Forkast.News first started, and I remember at the time when you and I were speaking, it was such a new, incredible space. We both knew that the players would come. But at the time, I think a lot of people still had reservations about what the space actually was.

And then, lo and behold, now you’re CB Insights company, now we've got an incredible global audience of readers and viewers, and that just grows — it feels like by the week, by the month — even covering the space. 

Now just take a look at the latest headlines, we’ve got a recent one — Mastercard and crypto firm Bakkt announcing a partnership to enable cryptocurrency card payments. So, then, it's going to be easier for banks and financial technology firms and merchants in the Mastercard network to accept crypto payments. Banks and other financial institutions can issue cards through Mastercard and also be able to issue crypto debit cards that allow people to earn rewards through Bitcoin. These are the stuff of mainstream conversations that are suddenly landing in blockchain and crypto.

What does this create for a mainstream audience? How do they navigate all of these new opportunities, but also try to navigate it in a responsible way?

Knegtel: There are two key components. The first one is that blockchain, Bitcoin and cryptocurrencies are no longer some young, innovative technology. We just hit the 13th birthday of Bitcoin since the white paper or something. This is getting old now. It's almost a teenager.

One aspect is, when people hear about something for the first time, they're like, ‘Oh, no, it's scary.’ And then everyone always used to think ‘Bitcoin, crypto, bad, criminal.’ And that narrative has now kind of slowly faded away into the background in people's minds, so it's easier for people to be open to the technology.

The second thing in terms of mainstream adoption is really around the abstraction of the layers of the technology away from, let's say, common use cases. So, for example, storing crypto — it's always been not your keys, not your Bitcoin. And that's maybe true. But that is where the self-custody of crypto assets is also not an easy task, and you need to be nerdy in some senses of the word to actually undertake all of those processes.

And, so, when you take Bakkt, or you take any of these other, let's say, crypto services, it's making it a lot easier for people to actually enter the ecosystem and partake. And then they go down. As we all know from the blockchain space, you go down the rabbit hole and it's impossible to come back up again. That's just where the whole space then starts to become perpetual. ‘Perpetual’ is a word that I’ve started to use more and more when describing the ecosystem because more users are coming in, and then the value goes up, and then the value kind of gets circulated inside and people start funding each other, and then that's the stage we're at now.

Lau: So when you take a look at the ecosystem, what have you mapped? What do you see that’s going to be helpful — for us or even somebody new to the space — to understand broadly where everything fits and how they integrate together?

Knegtel: Yes, tough question. First and foremost, when looking at Blockdata, we tried to make a taxonomy that was as accurate as possible when representing the ecosystem, from the companies to the projects to the tokens — which tokens do those blockchains run on and then what products are also then interoperable? So that's how we look at it from a data perspective. 

From a research perspective, we try to take that taxonomy and simplify and flatten it… in a way make it flat. So that’s where somebody that is interested in a particular topic can come and find some research to then have that overview where they're like, ‘Oh yeah, that makes sense in relation to the other technology that I've used’ or, ‘Oh, in traditional capital markets, this is how it works in blockchain.’ And we're trying to do this mapping in people's heads of like, ‘Oh yeah, this isn't so crazy. This is very much like what I've used in the past.’

Lau: Challenger banks and innovative financial platforms such as PayPal and Revolut — you could say they've presented an alternative financial transaction vehicle for a lot of people. But more recently, Jonathan, we've noted that crypto banks have emerged to challenge the challenger banks in disrupting finance. How is the crypto banking landscape shaping up, and how do you expect this to impact the existing network of challenger banks and traditional banks?

Knegtel: So to start off, I will give a short introduction to that. It's really about the types of services that they provide to consumers or to businesses when it comes to managing money. Now that is where we have traditional banks that innovated very slowly all around the world. We all know that. And then you had these challenger banks that came along — a lot in Europe — that were innovating and providing a much higher level of service for a different generation of people than banks traditionally served — Gen Z being kind of the case in point, or the millennials, or however you want to call it. The people under, let's say, 35.

And those are the challenger banks. But what I want to say about them is, it's important to remember that they still relied upon the traditional financial system and all of the limitations that that financial system had. So now what we see is we see a new generation of services that, most importantly, are providing almost the same level or same feature parity as the challenger banks or the traditional financial institutions, but the payment rails, or the rails that they're using to actually manage the assets, are fundamentally blockchain-first.

So, this is one of the diagrams that we made recently, where this is the traditional financial circle, you can say. And the reason why we put that there is, they're providing traditional financial services — be that debit cards, be that trading or exchanging. We then map the challenger banks over here or the financial service providers, saying, ‘Well, now they're not only providing traditional financial services, but these challenger banks are also providing integrations with crypto exchanges, where you can also custody crypto, but they provide both fiat support and crypto support.’

That is where these crypto banks are that are sitting in the middle. They fundamentally allow you to deposit fiat, but then they convert that into some form of cryptocurrency — be that a stablecoin or Bitcoin or Ethereum. But they also provide services like debit cards, the ability to lend out your money, or the ability to borrow, much like you can in the traditional financial system.

So it's kind of a merging of the modern payment rails that blockchain provides and the traditional services and traditional financial system that you are used to. And, of course, here we also wanted to put some non-custodial wallets, as well as some of the DeFi applications to show that as a user, as a consumer of these services, you can actually go into and manage your financial life out of any one of these kind of subsections on this Venn diagram. And depending on your risk tolerance, and maybe your technical knowledge… for example, if I'm a new user, I'm not going to go to DeFi to earn my interest — I'm probably going to use something that I'm more familiar with and comfortable with, like a crypto bank.

Lau: And this phenomenon, would you say, is relatively new here, probably within the past 8-12 months?

Knegtel: To reach a form of maturity and trust, yes. Companies like Nexo, which is what we define as a crypto bank or, more accurately, a digital asset institution — which is actually that legal term, it's important to make that distinction — were founded, I believe, in 2018, maybe even earlier. That was a new type of service. As with any type of service, it's got to earn the trust of the ecosystem.

And what we're also seeing is that these institutions are actually becoming registered in multiple different countries to again provide that trust to these end users, where it's like, ‘Hey, we're actually regulated,’ and they're welcoming regulation, which is another point I'd like to point out. Bitcoin traditionally has always been unregulated. It's always been a little bit like the Wild West. But we're now seeing an increase in the amount of products that are saying, ‘Hey, we want to be regulated,’ because that is then the gateway that is opening up a large amount of customers. And so that is where you also then get the maturity and again, you get this exponential, let's say, pace or picking up.

Lau: And we're certainly seeing the pace of the regulatory licensing accelerate in Asia, as well — at least in some jurisdictions like Singapore and others, whereas others, in Asia and around the world, are … starting to be a little bit more strict and specific. But to your point: the regulatory guardrails are increasing, which is — as you've rightfully pointed out — leading to a maturity of the space. Whereas, when they were starting in 2018, 2019, it was like, ‘Who are these guys? Ok, let's see if they stick around.’

And indeed, not only have they stuck around, but the adoption rate of the next generation of users shows validity and appetite for a new type of product. So challenger banks that challenge traditional, or TradFi, are also being challenged by this new generation of crypto banks.

Knegtel: Yeah. ‘Crypto banks’ is the non-legal term — ‘digital asset institution’ being a legal term. But on the topic of regulation, (let’s) talk about that very quickly. Traditionally in this space, it's always been like ‘No, regulation is bad. We don't want regulation.’ And I think the conversation is now turning a little bit to saying, ‘It's not that we don't want regulation. Specifically, we don't want bad regulation.’ Good regulation can be positive for the ecosystem, allows new opportunities, allows companies to mature and service more and more customers.

Lau: In a recent Blockdata report, you found that in your sample size that 12% of Gen Z are already saving for retirement. That's pretty savvy. That generation now roughly between nine and 24 years of age. Do you think challenger banks change the expectations of these tech-savvy generations when it comes to financial services and user experience?

Knegtel: I think the short answer there is ‘Yes.’ If this generation grows up and they have to open up a bank account in a traditional financial, let's say, a traditional bank, that is not an enjoyable experience that arguably nobody wants to go through. And now suddenly you sign up on your phone, you get your card through the post, you take a photo of your identity and you're done, and it's like, ‘Hey, we're here.’

So I think, to your point, challenger banks definitely introduced the concept, but that means it's a lower jump for them to then jump to the next point and be exposed to crypto. But that's where I think it's a lot about financial education, in a sense... that responsibility is very important within this ecosystem. Because you can also go and open up an account somewhere where you can trade leverage and then within 10 minutes, you've lost your money. So I think with ease can also come downsides.

Lau: Well, there's something to the ‘gamification’ of it, which brings people to the space. But to your point, there's a level of real money that you're saving and you're using. And if you lose it, you lose it. And if you owe it, even worse.

Let's talk about what you saw this year for Q3, an all-time high for funding raised by blockchain companies in a single quarter, topping previous all-time highs set in Q2. That's pretty incredible. Let me just take a look at some of the numbers here. It's just mind-blowing. In Q3, blockchain companies raised US$6.5 billion. That’s nearly a 30% increase from even Q2. What's going on?

Knegtel: The key thing is that the size of the rounds is getting larger and the amount of the rounds is actually going down. That's a key differentiation to make, in a sense... that the companies that were around for a longer time, they're now hitting a critical mass point where they're like, ‘Hey, we now need not US$10 million in a series-A. No, we need a US$700 million series-C.’ And that’s why we're getting the higher numbers. And again, it's just another indicator of the maturity of the ecosystem, but also stats like half of the top 20 venture capital firms have some form of exposure to a crypto exchange, and that is also showing crypto as a medium of store-of-value, storage is also starting to be treated more and more seriously. Yeah, that's the short answer.

Lau: For people who are kind of like absorbing those numbers right now, what is it about the mainstream adoption of this space? Is it correlated to also what we're seeing in the macro environment — the Bitcoin, Ethereum and altcoin cryptocurrency markets? What’s driving this incredible investor interest into blockchain right now?

Knegtel: So I think on the macro point, I'm sure everybody hammers on about it at this point, but inflation is now becoming a thing. And so that is where I think a few years ago, everyone was like, ‘No, we want our current system, and it needs to stay the same, and we don't want anything new.’ And now it's starting to look like... and investors are starting to educate themselves again. We've had a long period of education now where they're realizing, ‘Hey, cryptocurrencies might not be the revolution, but they might be the evolution of the financial system.’ And if we're not placing a bet there, then we're actually betting against the system staying the same as it is now, which is pretty obviously not working very well in 2021.

And I think the second thing is, again — coming back to this ‘perpetual’ point that I said earlier — as the ecosystem gains in value, people then have more money, so they're continuing to invest. And if you look at early crypto VC funds and everything, I'm pretty sure the percentages that their funds have made now is very, very high. So it's also very easy for them now to go back onto the market, find limited partners. You say the hype word  ‘cryptocurrency,’ Bob's your uncle, you’ve got your cash.

Lau: Where is this cash landing? Are there certain sectors of the blockchain industry that it’s landing in? Is it the play-to-earn space? Is it the crypto banking space? Where are you seeing these pockets of dollars landing?

Knegtel: A few years ago, it was really on the infrastructure. It was like, ‘We need to build the infrastructure.’ Now we're starting to form in very specific areas. So in 2020, last year, it was more into the DeFi space. Now moving into this year, the huge (crypto exchange) FTX rounds are skewing the numbers a little bit, but it's primarily going into crypto exchanges as well as NFT platforms — especially NFTs being the most recent exciting space for people to deploy capital into.

But I think the way we look at it is, ‘Sure there's increases in particular areas, but the consistency is what is important.’ And the funding, even though it went drastically lower in the past, especially during the bear market of early 2020, it didn't mean that the dollars stopped flowing. The dollars were flowing from the people that were really, really diehard about the space, like, ‘Yeah, this is where we're going.’ But now you see, just as in traditional VC, if 20 people are in on a deal, to get the 21st one in is also not so difficult.

Lau: It seems the exchange space is really growing by leaps and bounds, but also on the back of NFT. There’s a market here that a lot of platforms are trying to serve. What do you think the next generation of infrastructure is going to look like that centers around this new space?

Knegtel: Referencing one of the previous points about abstraction — fundamentally, blockchain is code, and 99% of the human population don't care about code, they just want it to work. And so with the exchanges, they are basically competing for who can get the most users and who can make sure that those users never leave their ecosystem. It’s like a platform. It's a platform that one person logs into and behind that platform, they can access many different services.

And so this is becoming particularly competitive, because it's the management of the assets — be that a crypto asset or an NFT. For example, if I buy an NFT on one platform, I'm probably going to keep it within that platform. Or, for example, in gaming, it's the same. They're actually competing for attention. And how it all works in the back end is not important, but it's becoming less dependent on, ‘Hey, do I have the best technical advancements?’ and more becoming, ‘Is my platform the most accessible?’

And one important thing is — when you talk about layer-1s, the fundamental blockchains — there’s still intense competition over the developers of that ecosystem, because, at the end of the day, those are the developers that are making that blockchain and all of the bells and whistles. So to say that that blockchain can … make that accessible… without the developers, again, it's just a piece of code that's running on computers distributed around the world.

Lau: I think as the industry matures, so too does the sophistication and the comfort level of the new generation of investors. They might not care too much about centralized crypto exchanges. There have been hacks, concerns about cybersecurity and also being replaced by DeFi. Do you think that at some point centralized crypto banks are also going to be challenged by decentralized exchanges or decentralized services in DeFi?

Knegtel: It depends on your time horizon. Two years, probably not. Ten to 20 years — hell, yeah. We always say the crypto ecosystem goes like this. It's these waves. And if you look at this stock to flow model, it's generally going up. Despite all of these, the curve is actually going quite straight and up to the right. And so that is where the maturity of the space and how all these blockchains interconnect and all of these bridges, second layers, scaling solutions and all of this, this is just the train that is just going to continue and it's going to get easier and easier.

But that’s where — compared to traditional systems — there wasn't really a network effect with Oracle databases or enterprise resource planning systems or anything like that, whereas with blockchain, the more data that goes onto it, and the more financial data, for example, with DeFi, the more interconnected everything becomes, and you get these network effects. We're not at this exponential point yet for this technology, but when it happens, I would not want to be in the traditional world, let's just put it that way.

Lau: Now that's science right there — hell, yeah. That's definitely a quotable scientific fact right there. But your data even suggest that institutional DeFi is poised to become a US$1 trillion industry. This is built on a smart-contract ecosystem by principle. It's a peer-to-peer financial network that disintermediates banks and brokers. So, conceptually, how does this actually work? Is institutional DeFi challenging the core principles of decentralized finance by simply playing in the space?

Knegtel: Yeah, it's important to really break down what's going on and look at the traditional financial system and be like, ‘What services does it provide?’ And, most importantly, it's broken down into two core concepts that power the entire economy. It's the payment of the service and it's the delivery of the service — the payment leg and the delivery leg.

And so when you look at services like DeFi and a lot of the different blockchain solutions, they provide that same functionality — the delivery of something and the payment of something, and where it's immutable, and all of these things that we have about blockchain. So when looking into institutional DeFi and speaking with a lot of the corporates and institutions that were interested in the space looking to adopt the technology, there was always this big red flag where it's like, ‘Hey, it's great that it's on a blockchain, but because it's on a blockchain, I don't always know who my counterparty is.’ Which means from a regulatory perspective, I have a really hard time partaking in this economy, just because of that simple thing. I don't know who I'm trading against.

But the reason why they wanted to get into it is because just like in the traditional financial system, there’s an opportunity to earn money. Exactly the same reason why consumers are getting into this space is why financial institutions are getting into this space — funny, that. That is where they wanted to get in. They couldn't. Now, what we see is rather than the institutions moving to the DeFi protocols, we now see the DeFi protocols building and moving towards the institutions to make sure that they can service it.

Lau: And to your point, that's where the money is right now. Stablecoins — a lot passing through a lot of mainstream lips right now — they play a very important role in DeFi, whether it's staking, liquidity, mining, lending... The lack of volatility in these assets is just too important for some of these investors. Do you think that with the advent of central bank-backed digital currencies, there’s a similar role to play in the future? Do you envision that sovereign nations are going to want to participate potentially in this space as well?

Knegtel: ‘Yes’ is the answer. Anything is possible when history is still to be written on this topic. I think people always think, ‘Oh, history is now. I'm here in the now and this is a point in time.’ But we know that financial systems have evolved many times throughout history. And for us, this is always a little bit of a peculiar topic, because we don't want to be pro-stablecoins or pro-CBDC. It's our job to be objective unless it comes to the adoption of the technology. That's definitely happening.

So our commentary tends to be this. When you look at stablecoins versus CBDCs, and then you look at merchant adoption for example, Coinbase, or the integration of stablecoins into DeFi protocols — fundamentally, CBDCs in some way or form are also blockchains. At least that's the direction that they're being built now. There are many different variations, and we won't go into the technicalities, but whenever a company — for example, PayPal — is now adopting cryptocurrency, they can also go and integrate a CBDC in the future, and the functionality for the end-user will stay the same.

So I think the biggest thing that's going on right now is a political conversation in terms of financial stability and what control would a nation like to exert on their own economy or exert on other economies. There are different approaches, and we obviously see what's going on in China. That is one direction and one application, whereas currently what's going on in the U.S. is making it legal for financial institutions to hold US dollars in terms of stablecoin issuers. That’s basically putting their hands up and saying, ‘Hey, the technology, the Silicon Valley of our country …  go nuts because we want the dollars to also be usable in these financial systems.’

Lau: That’s certainly an evolving conversation. You know what else is evolving? It's who's having a Cinderella moment right now? I think for sure, we could say, summer of last year, it was DeFi — DeFi was having a Cinderella moment. This year, let's just call it out — the mainstream audience wants it, they're buying into it. I'm talking about NFTs here, non-fungible tokens. We've observed major cryptocurrency exchanges making sure there is a market. And you were talking about that, where users can buy and trade NFTs in their exchanges. Why do you think this space is so hot right now, and why do so many financial service providers want to be in this space?

Knegtel: Because I think they realize, again, that this is becoming an evolution. It's just not going away, you can say ‘No’ many, many times. But also — going back to maturity again — when we look at what's happening... institutional DeFi, and we look at a lot of the centralized providers, they provide institutional services that appease not only the front office of these financial institutions, which traditionally is the traders that are like, ‘We've got to get involved, we've got to be deploying assets into this space,’ but now the service level has gone up so much that the back office — traditionally the compliance guys who have said, ‘No, we cannot do this, this is not OK’ — they're now starting to be like, ‘Actually, if they're saying that and they have this and ... We can actually get involved in a regulated, compliant and — quote — risk-free environment’ — I put that in quotes because crypto still has inherent risks — ‘we can actually start to deploy capital.’

You mentioned the … potentially US$1 trillion opportunity. When we talk about DeFi and institutional DeFi, and just the crypto asset space in general, we have to remember that the size of crypto in terms of market cap is nothing, just minuscule, compared to the amount of traditional assets that exist in the traditional financial system. And so that 1%, which was US$1 trillion is just the assets under management of the top 100 banks in the world. And let's take 1%, and the core argument of that research when looking at some of the stats is 1% as a part of an asset diversification strategy in 2021 is not that much. And that alone would bring another US$1 trillion.

Lau: It’s just incredible to see just how quickly the assets are flooding into the space. But you're absolutely right in terms of real-world percentages — it's actually at the beginning stages. And also at the beginning stages, there are issues and real concerns that include copyright fraud, theft and more issues when it comes to NFTs and digital collectibles. I think everybody's been talking about this Squid Game facsimile token. It's loosely correlated to the hit show, but it has absolutely no specific intellectual property. They're just calling themselves this. And then there are questions of whether or not people who are buying into it can trade off of it. Can they actually excrete value from it? So there's just so much. What are you seeing from your data and your research? What’s the social sentiment towards NFTs looking like when dealing with the legitimacy of these NFTs?

Knegtel: As everything starts in blockchain land, it's the Wild West. And I think a nice example is CryptoPunks, which was one of the early projects that really got a lot of interest, not only price-wise, but also just the whole community knew about them, and they made a really strong community. Fundamentally the people that were behind that were somewhat trusted. There was a lot of checking like, ‘Hey, is this okay?’

And because when everything starts to happen — as what happened with ICOs in 2017 — everything starts to move so quickly that then suddenly everyone's involved and everyone's armed. We had conversations in the office of people's aunts selling NFTs on OpenSea, and I'm like, ‘Hang on a minute, did I miss the program somewhere?’ And so I think, when it comes to, let's say, the sentiment, it's like everyone wants to get involved, everyone wants to get rich. But it is completely unregulated, because we're operating on a public computer like Ethereum, where anybody can do whatever they want.

And I think just as quickly as people make money, people can also lose money. Or people get excited about NFTs, and then they put (them) on OpenSea, and then nothing happens. And then people can also lose interest in the technology or the idea that it represents because, hey, nothing happened. And so I think this kind of circles a little bit around to regulation. For example, there's nowhere where you can register yourself as an NFT creator and you can get a stamp or maybe another NFT that proves your authenticity as an artist or what you're going to create — an audit of the code.

And so, to maybe just try to answer your question directly, this isn't going away any time soon. But the space has a lot of places, a lot of areas where it still needs to actually go and mature, because otherwise it still feels a little bit like a get-rich-quick type scheme, which is obviously not what NFT stands for — there are cultural incentives.

Lau: There's always this cultural moment where suddenly dollars are involved and then it takes on a different spin. As with even crypto itself, there's this philosophy and then there's the reality. And the real-world applications. But look, Jonathan, you sit on a lot of data, you look at data every day until that tie around your neck turns into wood. So you sit on a lot of data for the audience, what are the three things that blow your mind when you think about 2022?

Knegtel: The three key points for 2022 the first one is blockchain fundamentally is here to stay, and we're going to see a lot of maturing use cases when it comes to business applications of blockchain — not speculation or anything like this, but really, ‘Hey, how am I moving my business onto blockchain, from my shareholder registry to how I send and receive payments to how I do my tax and accounting only using cryptocurrencies?’ — which is almost every back-office thing that a business needs. That is, I think, the first thing about 2022 that gets me really excited. And from all the conversations and the data that we're seeing, it's like we're hitting this inflection point in the ecosystem. The price might not represent that, but when it comes to the adoption and integration of the technology, it's happening. It's really just happening.

I think the second thing is obviously when it comes to the price of crypto — and again, to these real-world percentages that we were talking about — blockchain and crypto has a lot of space to grow. And in no other previous bull runs that we've had with crypto did it have this inflection on inflation, where they kind of happened at the same time. Now that is where the bull run that we're now in — or if it's going to get even more because of the maturity of all the solutions that we've been talking about in the past — is happening for an institution to actually now migrate that assets from fiat into blockchain-based assets. It's getting easier and easier, which means that the barrier of adoption is gone and it becomes less of a cognitive update that they need to do to their organization. It's like, ‘Hey, let's just call Coinbase and they'll help us do it.’ 

Then I would say the third one is — I'm going to put NFTs and gaming together because I think that is where NFTs have a large tie — also with gaming. And I’ve played a lot of games in my life. So I think that’s where the intersection of maybe different ideas in blockchain kind of comes together to create these applications, these play-to-earn models, whether there's true ownership of the assets that you're having. And that intersection is going to be huge, not only next year, but also moving into the future, because for the first time — going back to Gen Z — people who are of a younger generation who most importantly are digitally native… they've grown up with the internet… can now own assets on the internet for the first time in their lives. Next year, I think we're really going to start to see the effects of that. And as long as it's done in a responsible way, I think it will be great. But between that, a lot of stuff is going to happen, probably.

Lau: This is a great primer, and I'm going to do a shameless plug here for Forkast's first global virtual summit that we're throwing with our co-partner, AAX. And it's on Nov. 10 in Asia, Nov. 9 for the U.S. side and Europe. And Jonathan, I think this conversation is seriously a great primer, because it really helps conceptualize where we've been and where we're going, which is the whole purpose of our summit, ‘Bitcoin and Beyond.’ So I’ll know if you haven't signed up, you're signing up and you're going to hang out with us, right?

Knegtel: For sure, for sure, if it's virtual, I'm in. I don't do the physical world.

Lau: We’ve got to do it. Well, you're in Amsterdam, and it's just always such a great pleasure to connect with you. And I think it's the first time we’ve actually got to do this. But it's always great fun just hanging out with you. I always feel a little bit smarter after talking to you, and I know our audience does, too. Thanks a lot for joining us on the show.

Knegtel: Thanks ever so much. It's been a pleasure, and I hope everyone learns something. I’ve tried to simplify it. 

Lau: It's always an experience. Jonathan Knegtel at Blockdata, thank you for joining us. And thank you everyone for joining us on this latest episode of Word on the Block. I'm Angie Lau, Editor-in-Chief of Forkast.News. Until the next time. 

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