Cryptocurrency (crypto) has generated a gold-rush mentality over the past few years, with many investors choosing to bet on the bank and risk it all. But is this overexuberance overrated—and what does it mean for businesses in the short and long haul?

With all of the hype, it can be challenging to recognize the risks and harsh realities of crypto and can cloud our ability to make informed decisions. As a crypto aficionado who’s followed the industry news and trends, I’m shedding light on whether some of these statements are true or a myth—and sharing my thoughts on crypto’s future.

Crypto-fever is over-exaggerated. True

Crypto-fever has caught the attention of business investors but it remains a very speculative asset class with much trading still driven by private investors. Much of the excitement is highly over-exaggerated—posing a considerable risk to investors.

Crypto is fully adopted as an efficient way to make payments. Myth

The headlines say that crypto is taking over as the go-to form of currency. But full adoption of the current distributed and decentralized cryptos have been slow—making this statement a myth. I think we’re potentially 10 years away from it being a significantly adopted and efficient payment source. Currently, many challenges need to be addressed, including regulatory and fiscal risk, anti-money laundering (AML), transaction speed and cost, technological enablement and last but not least – energy efficiency.

Regulatory and fiscal risks

Monetary policy exists to maximize employment and stabilize prices in the economy. Whether we like or dislike monetary policy or inflation, the reality is that crypto doesn’t address either of these. If decentralized currencies like crypto suddenly replaced fiat currencies, it’s unclear what the impact would be. Each developed economy would be faced with either issuing its own government-backed stable coins or slowly enabling crypto and closely monitoring the effects. This would require a massive re-tooling on a global scale. With approximately nine countries completely banning crypto and another 48 implicitly banning it, I think crypto is at last 10 years away from replacing fiat currencies.

Anti-money laundering (AML)

There’s no clear path today for how to deal with AML, criminal or terrorist financing, or eliminate fraud in crypto. It could be argued that crypto goes against the entire foundation global societies and financial institutions have in place to identify and trace financial transactions and funding sources clearly.

Crypto technologies

The speed and settling of crypto transactions on the blockchain have also yet to be solved. Currently, the dominant level 1 blockchain protocols simply can’t keep up with handling a large number of daily transactions. Level 2 chains may solve the speed problem but they increase new risks related to security and decentralization.

Speed and cost

It’s entirely prohibitive when it comes to the monetary and environmental costs. In its current form, Bitcoin takes far too much energy to validate transactions. This energy simply isn’t available to accommodate global trade at any meaningful level. Even with blockchains moving to ‘proof of stake’ protocols to address speed, as with Ethereum, there’s a concentration issue. Under these scenarios, those who can stake the transactions are essentially in control of determining the transactions’ validity.

This said, factors like governments stepping in and issuing stable coins could accelerate this timeline—but it would take substantial time and coordination between every government agency in each country to address and it would go against the original intention for cryptocurrencies to not be controlled by individual governments:

• Determining their stance on crypto
• Assessing risks
• Implementing regulations
• Determining taxation policies
• Solidifying and implementing AML and data collection policies and protocols
• Dealing with privacy policies considering crypto was designed to bypass privacy concerns.

There’s no coordinated approach to the crypto sector: Myth

A coordinated approach is in the works. Recently U.S. President Joe Biden signed an executive order directing federal agencies to coordinate their approach to the cryptocurrency sector. If you ask most aficionados, I think you’ll find they’re welcoming more crypto regulation because it makes crypto easier to adopt in business.

Currently, Crypto works as a transactional rail or chain: Myth

To work as a transaction rail or transaction chain, crypto protocols still rely on proof of work or proof of stake or other algorithms for distributed trust. Proof of work is still far too slow and very expensive to maintain compared to the volume of transactions. In contrast, proof of stake speeds things up but calls into question how decentralized and distributed the nature of trust on the network really is by potentially centralizing the power to vet transactions into the hands of a few large crypto players that will henceforth ultimately control the truth on the network.

I think there’s a need for faster and less expensive algorithms for distributed trust. The other option is for governments to step in and offer a stable coin, which would address the need for digital currencies and potentially allow for decentralization too. Of course, many, if not most, investors would say government intervention doesn’t excite them.

Things businesses need to know when thinking about entering the crypto space or using crypto for transactions.

More than 100 million people held crypto in 2021. Businesses and financial institutions should diversify and may want to consider putting a small percentage, let’s say under 5%, into crypto. This allows consumers and businesses to utilize crypto without too much risk. Any business can start accepting or using crypto simply by opening a digital wallet and utilizing any type of cryptocurrency they choose.

As of 2022, there are over 10,000 cryptocurrencies in existence. There’s a lot to consider when searching for a digital currency for your business to invest in and a digital wallet to hold the currency. It’s important to do your research when selecting a wallet for your crypto holdings. Some of the most prominent digital wallets and underlying infrastructure are very centralized and owned by relatively unknown companies surrounded by controversy. This can raise concerns about having your funds in a transaction network that has the potential to compromise the security of your holdings.

Reporting and taxation can also seem murky at best, and this will need to be sorted out. Any virtual currency is taxed the same way as any other assets, and the IRS has provided crypto tax guidance.

Benefits and drawbacks to consider

One of the biggest benefits of early adoption by businesses is gaining a leg up on competitors, however, it requires having the nerves to ride out the volatility and the potential effects of adverse regulation.

The drawback to rapid crypto adoption is that it might open your business up to financial instability and unpredictability. This can drastically complicate revenue and cash flow management and forecasting—and risk overall business survivability.

Advice to businesses concerned about crypto/financial stability, regulations, and consumer protection

Some businesses that rely on regulation, such as in the fintech space, will need to be careful about predicting where crypto is headed.

If countries decide to issue their own centralized currency, all decentralized currencies will likely collapse or be severely marginalized, creating the potential for a cascading effect in other cryptocurrencies worldwide. This can devastate many businesses that are dependent on favorable crypto policies. The key is to pace adoption within the company’s risk tolerance.

The future of crypto

Five years out, we’ll likely see an increase in consumers adopting crypto as an asset class. I see Exchange Traded Funds (ETFs) making crypto ownership more broadly available, but I don’t think there will be any massive worldwide shift toward crypto because of all the regulatory uncertainty.

New protocols will also come on stream; level two and three chains that are faster but not as secure or decentralized. Tradeoffs such as speed, privacy, and distributed control need to be sorted out.

There are far too many people euphoric over crypto, making it likely that worldwide consensus will be reached over regulations to either adopt or ban decentralized crypto over the next 10 years. I believe it’s unlikely that countries will be able to resist the benefits of cryptocurrencies and so they’ll come up with the necessary regulatory frameworks that address its stability, efficiency and privacy.

The article has been contributed by Mr. Stoyan Kenderov, Chief Operating Officer at Plastiq