What Can Go Wrong For Crypto In 2020 According To Industry Leaders

At the start of 2020 the crypto world is awash with predictions for what the year has in store. Many of us who are deeply involved in projects believe this will be a landmark year for crypto, and we see teams creating great innovation and bringing exciting projects to market.
In my opinion, 2020 will be a particularly big year for crypto and blockchain when it comes to regulation. The 5th AML Directive in Europe will create a standard that provides the opportunity for the industry to grow, but we must not be blind to the significant risk involved in these important undertakings. With all the promise, there’s a lot that can go wrong for crypto in 2020. 
It’s true that conversations with regulators can lead to positive outcomes for all parties involved, but there is potential downside if we go about it in the wrong way. In particular, there is a chance that regulators will be ill-equipped to deal effectively with this new sector, rendering them reluctant to fully accept the technology and resulting in oversight that is unclear and destabilizing for the industry. Banks and other financial institutions may likewise be unprepared to manage crypto business, and as a result, they could end up requiring full AML policies and procedures for every crypto or blockchain business. The likeliest outcome of this would be for banks to reject all crypto business due to a lack of sufficient systems and processes. 
It’s important that we in the space are aware of the risks so we can mitigate them effectively. So I’ve asked some of the leading figures in blockchain and crypto to weigh in on what they think are the biggest risks to crypto this year. Here’s what they had to say.
Diego Gutiérrez Zaldívar, CEO of IOVLabs (RSK, RIF & Taringa platforms)
2020 is going to be a breakthrough year for cryptocurrencies and blockchain. Some of the long-term impediments to the ecosystem reaching mass adoption, like scalability and volatility, are being solved by new offchain protocols, stable assets and improved on/off ramps to and from the traditional financial system. Nonetheless, a couple of systemic risks lurk in the shadows. Even if they don’t bring the ecosystem to a halt, they can definitely create enough damage to slow down the growth of the industry for several years.
The collapse of one of the major custodial stable assets: Tether led the way in the creation of stable assets (USDT) backed by fiat currency (USD) in custodial banking accounts. This is a key component in bridging the gap between the traditional economy and the crypto economy. It also plays a fundamental role in providing crypto holders a means to escape volatility without having to go out to the traditional banking system, and sets the foundations for DeFi (decentralized finance) to grow. With the proliferation of fiat-backed stable assets, if one of those custodians defaults, the damage to the reputation of the model is likely to be as severe as that done by MtGox to Bitcoin in 2014.
The collapse of the Ethereum network: Although the Ethereum Foundation has been working around the clock to release a new version of Ethereum (ETH2.0) that can solve the network’s bottlenecks, if it continues to grow at its current pace Ethereum could end up in a situation where running the base infrastructure (full nodes) is no longer viable. Although the system might recover by taking extreme measures, trust in the entire blockchain/smart contracts ecosystem would be tainted, delaying adoption of the technology by several years.
Regulation as a way to stifle innovation: This year the Travel Rule requirements for crypto will come into force. These are far stricter than those applied to the traditional banking system. The regulations have room for interpretation that some enforcement agencies might use to create additional friction and slow down the growth of the ecosystem. The crypto industry has the unique opportunity to build solutions that fulfill regulatory requirements while protecting the ethos of privacy protection. If the industry manages to do this, it could be the start of a golden age for crypto currencies. If not, we could be in for a few more years of crypto winter.
Ruth Wandhofer, Global Fintech 50 Influencer, Partner Gauss Ventures, I-NED London Stock Exchange Group/Permanent TSB, adviser Pendo Systems
Danger as adoption of smart contracts increases: As more organisations and ecosystems start deploying smart contracts – e.g., for ISDA purposes – potential vulnerabilities and risks with vendors will become a greater threat, since entire organizations’ operations could come to rely on these.
Joey Garcia, Lawyer, ISOLAS’ leading Fintech practice (ranked Band 1 by Chambers & Partners)
Regulatory standardization in the industry beyond KYC/AML compliance: This year we are looking for a level of standardization when it comes to regulation of the industry, moving beyond KYC/AML compliance. In 2020 the industry must develop into a space where there is stable and reasonably reliable comfort and security in dealing with virtual asset service providers around the world. Will there be a standardization of accepted global standards for KYC/AML, or will regional requirements continue to diverge? The transposition of 5AMLD in Europe and the FATF standards globally already display significant differences. If this continues, it risks hindering the industry and its development by creating an environment of confusion and inviting questions of interpretation.
Substantial infrastructure, related regulatory triggers and accepted tests will be needed. If this is not achieved, and the industry simply moves forward operating under simple and basic registration requirements or concepts of self regulation in different jurisdictions, overall growth may be significantly impeded.
Hazem Danny Al Nakib, Partner, 7BC, Managing Partner, Sentinel Capital Group
2020 will see three major trends: an increase in collective or consortium digital private currencies, a surge in the tokenization of securities and the creation of new digital financial instruments, and the continued development of Central Bank Digital Currencies (CBDC). Each of these carries a risk of going badly wrong.
An increase in digital private currencies: More and more organizations are coming together to capture value they currently facilitate to support their growth. This is coming in the form of new stablecoins, digital assets, and crypto-assets. The risk is that consumers ultimately receive less value in a more intermediated value chain while providing more value in the form of their data. This must be better regulated and consumers more informed. 
A surge in tokenizing securities, with the intention of driving liquidity, may have the complete opposite effect in the absence of the appropriate financial market infrastructure, transparency, and compliance. This is particularly true as it relates to counterparty risk, clearing, and settlement. 
The continued development of CBDCs: Lastly, the market narrative that sets central bank digital currencies and cryptocurrencies as opposing forces is misguided. Finding the most appropriate ways to balance their uses and applications will be essential in 2020.
Dean Armstrong QCTop UK lawyer on GDPR, data aspects, cybersecurity, recently also published a book on legal aspects of blockchain. Author of the book: Blockchain and Cryptocurrency: International Legal and Regulatory Challenges
The impact of regulation on an area that was previously very sparsely regulated: The 5th AML Directive came into force this month. One of its features was to bring crypto assets within its purview. This will create an interesting dynamic between the challenges of regulating digital assets with regulations firmly rooted in a non-digital environment. There will be challenges. One immediate example is the paying of ransomware demands in Bitcoin. How will the tension between the necessity of identifying the source of funds play out with the need to pay to restore services as soon as possible?
Final Thoughts
2020 is poised to be a crucial year for crypto. Many of the same currents that present such enormous opportunity -- regulatory standardization, as well as adoption on the part of financial institutions -- also threaten to hobble the industry if the infrastructure is not in place to effectively support these applications. This is the key challenge for the coming year: making the most of our emerging opportunities, and ensuring that we are all prepared for the requirements that come with being a foundational component of global commercial and financial networks.



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