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Are Cryptocurrencies a fortune held hostage?

Prices of Bitcoin have rocketed from $300 to over $16,000 at their peak in a little over a year. Other currencies, of which there are over 1,300 have seen similar increases. Whether this is a bubble or not remains to be seen, but even modest increases in cryptocurrency prices will leave early investors with incredible profits – on paper.

Recent reporting from the Financial Times showed that UK banks will likely refuse payments linked to cryptocurrencies, meaning these profits may be very difficult to realise in a straightforward manner.

The motivation of the large sums involved will force some of this new wealth into the financial system, regardless of the current resistance. If anything, resisting the inflows may force cryptocurrency owners further away from the traditional banking system, reversing the widespread popularity of this new asset class.

In the longer term, a split may emerge within the cryptocurrency ecosystem, with currencies and the businesses linked to them being divided into safe and unsafe currencies, with safe currencies generally able to be brought into the traditional system.

Bitcoin – as the most recognisable cryptocurrency – is likely to be viewed as safe, along with more mainstream currencies such as Ethereum. Their respective anonymity has been eroded over time, or is not the main focus of the currency. Over time transactions involving these currencies will become relatively mainstream, especially as historical ties with criminality wane.

Currencies with deliberate or tacit support for truly anonymous payments such as Monero or PivX are true to the anarchistic roots of the cryptocurrency movement, aiming to be as close to cash in anonymity – however they also the most likely to attract negative attention, being connected to criminality and the potential proceeds of crime. These are likely to be regulated, at best, as cash is today – prevented from large scale access to the financial system without extensive evidence of the source of funds.

Regardless of the willingness of the financial system to accept cryptocurrencies, risks remain. It is hard to fully know the ultimate provenance of a particular coin or token, for example was a Bitcoin received from mining or from the proceeds of a ransom before it was bought by the buyer who is trying to exchange it for fiat currency today?

Our research shows that it is becoming easier to understand the risk implications of particular currencies and the blanket approach of declining cryptocurrency may not be a suitable approach in the future.