2025-1-3 17:00 |
On Nov. 6, I wrote a memo to EY’s blockchain leadership team. The headline was simple: “Every single private blockchain just died.” Since November 2022, the crypto and blockchain markets have been defined by caution and gradual recovery. The direction has been consistent and positive, but slow, especially in 2023.
In 2024, we saw a gradual but sustained acceleration. The year started with the Bitcoin exchange-traded fund (ETF), and just kept accelerating through an Ethereum ETF, and the adoption of the EU’s Markets in Crypto Assets (MiCA) legislation.
We were on a path of steady, global regulatory convergence, including rules of the road for all the major crypto and digital asset types. We were also on a path towards public blockchains. Bitcoin is a kind of digital gold, and Ethereum is a development platform for digital assets and services.
The path may have been consistent, but the pace was measured. It was routine to hear people at big financial institutions tell me that they would love to move to public Ethereum but “the regulators won’t allow it.” On the night of Nov 5 (following the U.S. election), the prospect of substantial regulatory change became a reality. Any certainty about what regulators will or will not allow was suddenly out the window and a clear direction of travel was radical acceleration on public networks.
There is no absolute certainty in life, but if I must make predictions about 2025, it is that we will indeed have a seachange in the U.S. regulatory environment, and that will, in turn, bring about a collective global shift in the same direction, though not necessarily at quite the same pace. However, since the U.S. is by far the world’s largest financial market, that counts for a lot.
Bitcoin is already a big winner here. It is cementing its place as the digital version of gold, and could in the course of 2025, take up that role officially with countries and governments dipping their toes into strategic bitcoin reserves. My own past prediction was that Bitcoin was likely to continue growing until it reaches the size and market cap of gold, which is currently about $14 trillion. In many ways, Bitcoin is much more attractive as a scarcity-based asset. Higher prices for Bitcoin do not increase the supply, something you cannot say about actual gold.
Ethereum will be the second big winner. Ethereum has transitioned smoothly to proof-of-stake, dropping carbon output by >99%, and it has also scaled up massively. The combined Ethereum network (Layer 1 mainnet and Layer 2 networks) has several hundred times the capacity it had during the last bull market. Transaction fees are low and likely to stay that way for some time. Massive scalability, low costs, and an outstanding security, and uptime record are going to make Ethereum the choice for most digital asset issuers.
Beyond cryptocurrency, the single biggest boom we’re likely to see in 2025 is likely to be around stablecoin payments. The value proposition and business case for stablecoin payments is already strong. Around the world, users want access to U.S. dollars, particularly for international remittances. Use of dollar stablecoins was already popular with crypto users, but access and use cases are spreading rapidly. Circle works with Nubank in Brazil, for example, to make USDC payments directly accessible to all account holders. Celo, an Ethereum network, has partnered with Opera to put stablecoin payments into Opera’s web browser, which is optimized for low-cost smartphones popular in emerging markets. Celo’s stablecoin transaction volumes have been growing rapidly as a result.
Stablecoin payments are reaching into the enterprise sector as well. EY, PayPal and Coinbase have worked with SAP to enable fully automated payments from inside enterprise ERP systems. Now, the same in-system automation that works for bank accounts also works for crypto-rails payments. This is particularly important for enterprise use where processes that cannot be automated at scale have no chance of adoption. When combined with improved privacy tools (and better regulatory treatment of privacy systems), crypto rails look like much lower cost options for enterprise users.
2025 is also likely to be a breakthrough year for decentralized finance (DeFi). DeFi relies on software applications running on-chain to replicate key functions in financial services and banking.
Throughout 2024, DeFi was the one area of the crypto ecosystem that saw no real movement on regulatory clarity and, thanks to high real-world interest rates, wasn’t a hugely attractive option. The regulatory environment is likely to be much more favorable for DeFi in 2025 and if interest rates come down, a more aggressive search for incremental yield on-chain could take off. DeFi tools that allow people to loan their assets into liquidity pools and other services in exchange for additional return on the asset (and added risk) might become popular again.
So the revolution won’t be about something new or different, it will just be about everything rushing forward all at once. And across the board, the competitive intensity in every sector of the blockchain ecosystem is about to get dialed up to 11, (my “Spinal Tap” reference). Companies, banks, brokerages, insurance firms and more that were sitting on the sidelines and watching with horror in 2023 and caution in 2024 and likely to take the plunge in 2025. I’ve already lost track of all the big firms that have announced plans to offer a stablecoin, a real world asset, or start selling bitcoin and eth to their customers.
Competitive intensity inside the blockchain ecosystem is already dialed up to 11, and 2025 is going to be a rough year inside the market. People running blockchain networks and services should be forgiven for wondering if these are good times, is it worth it? Inside the Ethereum ecosystem, there are now more than 40 different Layer 2 networks. Competition on transaction fees is brutal, differentiation across Layer 2 networks is low, and more competitors are entering the market.
Rough as it is inside Ethereum, it may be worse outside as “alt-L1s” face a combined Ethereum ecosystem that looks scalable, secure, and reliably low cost. Some networks, like Celo, already made the pivot from competing with Ethereum to being a part of it. I expect more will follow in 2025.
The only worse place to be than facing furious public blockchain competition may be in running a private blockchain. When your value proposition is “it’s as close to Ethereum as the regulators will allow” and all those regulators are being moved out, the prospects are especially bleak. I’ve already fielded calls from firms in private networks asking about how to pivot and how fast it can be done.
Lastly, I predict 2025 could be a fabulous year for fraud. A carnival and casino-like atmosphere in online trading combined with rapid regulatory loosening could attract the same grifters that showed up in the last crypto boom. What’s harder to predict is exactly where this fraud may show up. People are generally pretty good at bolting the barn door after the horse has fled. So, things that worked in the past, such as hacking exchanges or borrowing from depositor funds, are going to be harder to repeat. Audits, regulators, and better security technology all contribute to that. That doesn’t mean the risk is going away, just that it will arrive in a new package.
Happy New Year and have a great 2025!
Disclaimer: These are the personal views of the author and do not represent the views of EY.
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