How Cryptocurrency is Disrupting Financial Markets and What the Future Holds

Foreword

Over the past four months, cryptocurrencies have taken the traditional financial system by storm, penetrating deeper into banks and stock markets than ever before. These dizzying changes have generated billions of dollars in profits for the industry, but also created increased risks for investors and regulators.

The pace of change has been so rapid that it's been difficult to keep up. We've reviewed the past few months to help readers understand the four major trends driving the cryptocurrency boom. We'll also tell you what to watch for the rest of the year. Will stablecoins boom or bust? Will there be more cryptocurrency trading on the stock market? Will stocks be traded on cryptocurrency exchanges? Can the good times last?

The biggest factor driving these four trends is President Donald Trump's support for cryptocurrencies. He transformed regulators from adversaries to friends of cryptocurrencies and pushed Congress to pass the first-ever cryptocurrency legislation.

The result has been an explosion of cryptocurrency products, transactions, and strategies. This shift has reverberated strongly across the stock market, banking, and fintech industries. Here's a look at what happened. Stablecoin Legislation In July of this year, President Trump signed legislation regarding stablecoins. Stablecoins are blockchain-based currencies used as cash in the cryptocurrency market. They are the type of cryptocurrency most closely tied to the mainstream financial system. These tokens are pegged one-to-one to the US dollar and maintain their value by holding liquid assets such as cash and short-term Treasury bills. They are similar to money market funds, but generally do not pay interest to investors. Today, cryptocurrency traders primarily use stablecoins to store funds on the blockchain as collateral or for international payments. Why it matters: The new law legalizes stablecoins and is expected to boost their use. This has attracted the attention of banks, fintech companies, and payment companies, who are exploring whether stablecoins can make transactions faster and cheaper than traditional wire transfers. In emerging markets, individuals and businesses already use dollar-backed stablecoins to hedge against inflation, cope with local currency fluctuations, and receive remittances from family members working overseas. The new rules could increase demand for Treasury bonds backing stablecoins. Increased stablecoin use could reduce investor deposits in banks, potentially reducing the funds banks have available for lending. What's Next: Regulators will negotiate the details of stablecoin regulation in the coming months amid intense lobbying from the cryptocurrency and financial industries. A key point of contention is whether cryptocurrency platforms can pay returns to investors who hold stablecoins. Banking industry groups oppose this, saying it would threaten bank deposits, while cryptocurrency groups support it, arguing that they need to offer competitive products. A separate cryptocurrency bill, called the Clarity Act, is headed to Congress. It would establish a regulatory framework for cryptocurrencies and could impact stablecoin regulations. A surge in new stablecoins. Recap: Until recently, there were only two major stablecoins: Tether's USDT, with $171 billion in circulation, and Circle's USDC, valued at $74 billion. Now, more stablecoins have emerged, and others are under development. Startups, banks, and fintech companies are jumping in, launching their own dollar-backed stablecoins or integrating with existing ones. Payments giant Stripe announced it will launch a blockchain called Tempo, focused on stablecoin transactions in areas like payroll and remittances. Banks like BNY and Morgan Stanley offer services to manage the assets backing stablecoins, while JPMorgan Chase offers deposit tokens that represent users' bank deposits on a blockchain. Stablecoins are primarily issued by cryptocurrency exchanges, giving them the power to pick winners and losers. Recently, the burgeoning crypto exchange startup Hyperliquid stirred up the industry by launching a bidding process and allowing users to vote for stablecoin issuers. This has also triggered a race to the bottom, potentially wiping out profits for stablecoin providers. Why it matters: Widespread acceptance of stablecoins means these tokens can be used for payments to merchants and suppliers, treasury management for multinational corporations, and interbank settlements. Smaller lenders like Cross River Bank are considering accepting stablecoins directly from their fintech clients. The surge in stablecoins increases the risk of cryptocurrency volatility spilling over into the traditional financial system. If one stablecoin collapses, investors could lose confidence and sell off other stablecoins. This could potentially trigger a sell-off in U.S. Treasuries, which support the market and the U.S. economy. What's next: Tether and Circle face pressure from new competitors to maintain their market dominance. Tether is launching a U.S. token that complies with new stablecoin legislation. The details of stablecoin regulations and the terms of cooperation between platforms and issuers will determine whether the industry remains profitable or transforms into a commoditized business where only the largest companies make money. Cryptocurrency IPOs: A Review: Cryptocurrency companies are going public and seeing huge gains. Stablecoin issuer Circle, blockchain lender Figure, and cryptocurrency platforms Gemini and Bullish all saw significant gains on their first day of trading. Lawyers say this is partly because the U.S. Securities and Exchange Commission, which has taken a friendly stance toward cryptocurrencies under Trump, is now giving the green light to cryptocurrency companies seeking IPOs. Why it matters: The public markets' enthusiasm for these companies has surprised even cryptocurrency insiders. Circle's stock price has soared 358% from its June IPO price. Even relatively small, unprofitable exchanges like Gemini have seen their shares rise, though their shares have since fallen below their IPO price. Many of these companies are effectively betting on cryptocurrency trading volume, which is highly volatile and has shifted some of the industry's risk onto stock exchanges. Less than three years ago, the collapse of cryptocurrency exchange FTX seemed to have been forgotten by investors. What's next: More IPOs are on the horizon. Crypto exchanges Kraken and OKX, custodian BitGo, and asset manager Grayscale are preparing to go public, some as early as this year. While IPOs brought crypto companies onto stock exchanges, the next big thing for the crypto industry is getting stocks traded on crypto exchanges. The goal is to put shares on the blockchain through crypto tokens, which represent investments in stocks like Tesla, Nvidia, and Circle. Companies like Robinhood, Kraken, and Galaxy Digital are working to promote the adoption of tokenized stocks, particularly among overseas cryptocurrency users who may not have access to US markets. Stocks Flock to Crypto A look back: Perhaps the most bizarre convergence of meme stocks and speculative cryptocurrencies has been this one. It began with Strategy (formerly Microstrategy), a publicly traded software maker that snapped up $75 billion worth of Bitcoin, positioning itself as a cryptocurrency proxy for the stock market. This strategy has since spread to smaller stocks, which are vying to become vehicles for various tokens, including Ethereum, Solana, Dogecoin, and the Trump family's World Liberty token. According to crypto consulting firm Architect Partners, more than 130 US-listed companies have announced plans to raise over $137 billion to buy cryptocurrencies this year. Why it matters: This means more cryptocurrency-related stock offerings, many of which are set up through complex private financing transactions. These offerings tend to rise in value when trading begins, allowing holders of the crypto tokens to sell them to stock market investors at a high price. This isn't good news for investors. Of the 35 such stocks tracked by Architect, the average return since the announcement of their cryptocurrency purchase plans was -2.9%. On the first day of trading after the announcement, these stocks fell 20.6%. What's next: Many of these crypto stocks, particularly Strategy, have become valued far more than the value of their cryptocurrency holdings, largely due to investors chasing the memecoin craze. Investor demand has enabled these companies to efficiently raise funds and buy more cryptocurrencies.

The market capitalization of companies is starting to fall relative to the value of their cryptocurrency holdings. This makes it difficult for them to raise capital and may force them to stop buying cryptocurrency. The factors that drove stock prices higher may begin to reverse.

At the same time, Nasdaq is increasing its scrutiny of these offerings, requiring shareholder approval in some cases.