Words Sarah Kocianski
November 23rd 2021 / 10 min read
The Fintech Briefing is a series of articles diving into the latest fintech trends that founders, investors, consumers, and corporates need to know about, brought to you by fintech expert and Founders Factory strategic insight lead Sarah Kocianski
NFTs, Bitcoin, Ethereum. Words and concepts that might have once been at the periphery of our technological awareness now firmly occupy the centre. Barely hours go by without the latest product launch, cryptocurrency craze, or NFT drop hogging the headlines.
It would be fair to say that we’ve reached a point where certain cryptoassets are widely known of—and yet they’re poorly understood by most. “Getting into crypto” is something consumers, founders, and corporates all talk about doing, but when it comes to reality, many don’t have the knowledge to effectively tap into the market.
For founders looking to capitalise on cryptoassets and their manifold opportunities, we’re diving into some of the drivers behind growing consumer engagement with cryptoassets, the impact of those drivers on behaviours and attitudes, and what opportunities they present for founders looking to enter this space.
General awareness and interest in cryptoassets has grown significantly in the past few years. In 2021, 78% of adults said they'd heard of cryptocurrencies, up from 42% in 2019. And yet active engagement remains low, with only 4.4% holding any crypto. That's likely to change over the next 2-to-5 years as cryptocurrencies, and cryptoassets more broadly, establish their position in mainstream finance.
So what are the factors driving engagement with cryptoassets?
Adoption by well-known consumer brands
The growing number of brands, like Robinhood and Revolut, are offering consumers the ability to engage with cryptoassets is impossible to miss.
They make it easier for people to directly access the most popular cryptoassets, such as Bitcoin and Ethereum, by enabling users to buy, hold, and sell them. This has been arguably the biggest driver of increased participation in the cryptoasset industry by consumers.
Meanwhile, big companies like Tesla are not only investing directly in cryptoassets, but flirting with the idea of accepting them as a means of payment. In the US, Paypal already enables users to pay for goods and services using holdings, by offering them the option to sell cryptocurrency at the point of sale and use the funds received to complete a transaction.
Yet the acceptance of crypto as payment remains largely experimental, and it's unlikely to move beyond that stage any time soon. It’s too resource-intensive and high risk for merchants and payment processors to commit to. Instead, we will see continued growth in financial and non-financial companies offering cryptoasset-related services as third parties make it easier, quicker and cheaper for them to do so.
Emergence of crypto-specific brands
Certain crypto-specific brands are playing a big role in public awareness around cryptoassets. Coinbase's spectacular growth and entry to the public market brought its services to the attention of a much wider range of consumers. As a company many had heard of on reputable news outlets, as well as legitimacy and accountability stemming from its IPO, has meant it’s played a key role in many people’s first foray into cryptoassets.
As companies like Coinbase continue to achieve scale and accrue positive media coverage, it helps convince consumers undecided about whether to invest in crypto to take the first step.
Rise of retail investing
The number of people investing for the first time rocketed during the pandemic—especially among younger consumers. That's due to their having more disposable income and more time to explore the world of investments, increased awareness of investment opportunities thanks to widespread social media campaigns, and a continuing low interest environment.
Gamified technology-platforms marketing themselves as commission-free are an entry point to buying stocks. These platforms often offer cryptocurrency investments alongside traditional securities, providing an easy way into the market for novice investors as their confidence in investing grows.
Regulators creating digital currencies
The emergence of Central Bank Digital Currencies (CBDCs) is likely to encourage regulatory bodies to drive consumer engagement with cryptocurrencies.
China is already running widespread trials of its CBDC, while Singapore, Australia, South Africa and Malaysia are also experimenting in the area. The Bank of England and HMRC launched a taskforce in 2021 to explore whether they too would start developing a CBDC, and the BofE created a unit dedicated to its own internal research on the subject.
Direct engagement with CBDCs will remain low until they offer consumers the opportunities for returns that match those of non-governmental cryptoassets. But the growing volume of experimentation in this area suggests CBDCs will take off internationally. As the results of that experimentation are published and distributed, it will further boost consumer interest and awareness of digital assets.
1. Embedding products and services
Customer needs have changed over the past 18 months. There’s a huge demand for startups who help consumers get more of their financial jobs done. One way to do that is to offer cryptoassets at a point at which it's relevant to suggest cryptoassets, such as when planning for their own or their loved ones' futures.
US digital-only bank Current's mission is to help bring 'premium financial services to everyone with a variety of modern lifestyles to help improve their financial outcomes'. It will offer customers a high-yield account available through its existing app, where the returns come from converting fiat into stablecoins.
The product is powered by Compound, which handles the complexities of engaging with Decentralised Finance (DeFi), enabling Current to offer its customers a new way to make their money work harder for them without going through the resource intensive process of providing the service itself.
2. White-labelling existing services
Businesses that have a way to help consumers get more of their jobs done using cryptoassets should consider distributing those services through third parties, especially if they are new to the market.
This has already worked well in the wealth management space—Betterment saw significant growth once it started offering its technology to advisors and has since raised funds specifically to expand its business-to-business (B2B) units. Within crypto, exchange Bitpanda recently launched Bitpanda White Label which enables other companies to offer their customers access to stocks, cryptoassets, and metals.
As more companies look to embed cryptoassets within their existing offerings, there will be greater demand for more providers with specialist products and cryptoasset expertise to help them do so.
3. Smoothing access to cryptoassets
Making the most of cryptoassets is still difficult for the average user due to complexity of common transactions. Cryptoassets can be bought to trade relatively easily from an exchange using a credit or debit card, but doing something further with that crypto requires moving it to a wallet before engaging with yet another platform to access other assets like NFTs.
Startups can improve that experience by reducing the number of steps involved—such as enabling consumers to fund crypto wallets directly from their bank account. Infrastructure provider Plaid helps a number of companies do this, including Coinbase.
Another opportunity lies in making DeFi easier to interact with. Ramp, for example, enables third parties to embed fiat cryptoasset purchases into existing customer engagement channels, reducing the number of steps needed for customers to start transacting. So far this is limited to companies that offer decentralised apps or crypto wallets, but it's not hard to imagine it expanding into a broader set of customers.
4. Developing new financial products and services
Cryptoassets and their underlying infrastructure enable companies to develop new financial products and services—both those that resemble existing financial instruments and completely novel offerings.
High yield accounts are one area for founders to focus on. Existing products offered by Current and Ziglu are gaining traction: their similarity to savings products and their high returns make them easier for providers to market and for consumers to understand. These can help build loyalty and engagement with larger financial companies.
NFTs have become increasingly popular among consumers as well as corporates (offered as rewards or perks by companies such as Amex). There’s a huge opportunity to develop services surrounding NFTs, as well as for an infrastructure provider that can help banks and retailers offer NFT-based loyalty and reward programs.
Green cryptoasset offerings remain limited—mainly due to the lack of common standards on what makes products or services ESG-compliant. Cryptoassets have received a lot of negative publicity around their energy-intensive production (more on that below). For founders, this opportunity for development is huge, either through developing products which can be shown to be ESG-compliant through existing standards, helping larger providers make existing crypto offerings greener, or by helping customers understand the ESG scores of their crypto holdings.
5. Developing value-add products and services
Aside from offering cryptoasset products and services directly, there is a significant opportunity for companies to provide value-add offerings.
Tax is one such area—a challenging area to understand given the complexity of the guidelines set out by tax departments, as well as cryptoassets’ decentralised nature and propensity for fluctuation in value. Companies like CryptoTax offer tax calculators, but as consumers’ cryptoasset holdings become more diverse, there’ll be a growing need for startups to meet this demand.
Protection is another area for development. As cryptoassets become more commonplace in portfolios, people will want to know there is protection in place as with traditional investments. Large exchanges like Coinbase offer insurance against theft, while others use specialist products like Coincover, but there remains an opportunity to offer direct protection to consumers or to cryptoasset providers.
Finally, investment advice remains limited and inaccessible to the ordinary consumer, and this is even truer for crypto-specific advice. Advisors that can provide cryptoasset-specific advice will find a ready market if they can do so in an accessible way. You may need to use a specialist third party platform to do this, while platforms will find it much easier to scale by providing a white-label offering.
Like any nascent industry, cryptoassets and the surrounding startup space are by no means fully formed. There are two key considerations that anyone looking to develop in this space should be aware of, both in terms of acknowledging the challenge it faces, and in terms of trying to overcome it.
Given reports about the industry's high energy consumption abound, a growing interest in environmental and social governance (ESG) poses a significant question to cryptoassets.
It's incredibly difficult to measure how much "dirty" vs renewable energy is consumed by mining cryptoassets, as the FT details. Instead, companies looking to enter the cryptoasset space should pay attention to how the industry is evolving inline with consumer expectations. The Ethereum network's shift to proof-of-stake verification of transactions will increase network speed, making applications built on it more scalable and reducing energy consumption by up to 99.9%. As regulators start implementing crypto-specific regimes, they’re introducing measures to reduce environmental impact, including setting minimum energy standards.
This shows that the cryptoasset industry isn’t developing in conflict with consumer expectations, and that seizing on these opportunities won’t necessarily be at odds with your ESG commitments.
The other significant factor is growing economic uncertainty. Many consumers' financial situations changed for the worse during the pandemic (and doesn't seem likely to improve fast as warnings about rising energy costs and inflation continue).
There’s a fear that cryptoasset offerings could encourage consumers to take risks with products and services that do more harm than good. This is fuelled by the growth of retail investing, as well as the messaging around new crypto offerings to "get rich quick" by setting expectations that crypto always offers high returns.
Any founder in the cryptoasset space must have an acute awareness of this. Fundamentally, they need to be sure how offering cryptoasset products and services will benefit their customers. They also need to protect against non-compliance with ESG strategies and any incoming regulation by proving efforts to prevent unsustainable losses and adequate customer suitability checks are in place.
Much has been made of the value or ‘real world’ good of cryptoassets. Fundamentally, cryptoassets are a tool that can help consumers to make their funds work better for them. Any founders or companies looking to capitalise on these opportunities should keep this at the centre of their cryptoasset strategies.
If you do that, you can be a part of driving and influencing a cutting-edge industry, while also being able to navigate some of the challenges and issues that come with entering an ever-changing space.
Image Credit: Quantum Ai Trading
Sarah Kocianski leads strategic insights for fintech at Founders Factory, providing subject matter expertise to the company and its partners. Previously she was Head of Research at fintech consultancy 11FS, and built and led the fintech team at Business Insider Intelligence.
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