A report has been published on the current fintech market at the request of the ECON Committee. It analyses competition issues in the sector and cryptocurrencies were featured in it.
The European Parliament Committee on Economic and Monetary Affairs, also known as ECON, is a committee overseeing the decisions made by the European Central Bank (ECB). At its request, the Police Department for Economic, Scientific, and Quality of Life Policies published a document analyzing the major competition issues the financial technology (fintech) area faces, including challenges in banking, forex, insurance, wealth management, personal finance, and cryptocurrencies.
The document defines what it calls ‘the value chain of cryptocurrencies’, which comprises several areas from the cryptocurrency industry — blockchain, mining, wallets and exchanges, smart contracts, and banks and credit card processors.
It carefully defines each area before analyzing its individual struggles. For example, it defines the difference between cryptocurrencies and e-money, stating the digital currencies are based on a decentralized peer-to-peer structure, while e-money is a conventional agreement between to parties — a central entity and the user.
When it comes to the blockchain, there are also distinctions to be taken into account — the difference between an open and a private blockchain. Open networks are permissionless and everyone is welcome; private, or “permissioned”, blockchains don’t allow users to access its records and verify information. Usually, this means that like any other network, a private blockchain is vulnerable to hacks and can be easily altered by those managing it.
The report defines mining as a business comprised of several sub-activities, such as specialized mining hardware design and manufacturing, hosting, self-mining, housing or cloud mining services, and mining pools. For some time now, mining has become so much more than a side-activity in your life, but rather a massive lucrative enterprise. Yesterday, for example, CCN.com reported how GPUs doubled in value during the mining fever, last year.
However, the report points out some of the issues with this industry, such as 79% of the market share being controlled by only five mining pools. None of them is capable of fully monopolizing the market, though — AntPool is reportedly the top mining pool, accounting for 23% of the total market share.
The wallet market seems to be the quieter one. Due to its low requirements and multitude of platforms available, anyone can enter the market. Nowadays, there are all sorts of wallets available, from web-based to browser extensions and mobile wallets on both iOS and Android.
Exchanges, on the other side, face the same issue as miners — five companies currently control 75% of the total Bitcoin market share, with the top exchange managing 30%. An extra challenge for exchanges lies with the wallets themselves — 52% of all wallets currently offer an integrated currency exchange feature. But then again, all exchanges essentially function as a wallet, too, which is why the report points out the lines between them are becoming extremely blurry.
They believe banks and card processors are key players in the industry, as they keep communication channels open between regulators and central banks. The alliance between the Santander Bank, American Express, and Ripple, is one of the examples given, as these working on permissioned blockchains.
The last analysis is of the inter-cryptocurrency and the intra-cryptocurrency markets. The former is represents the competition between different cryptocurrencies for supremacy, while the latter has different service providers fighting for success.
The report points out the difficulty of cryptocurrencies to succeed when most users converge on the same coin — Bitcoin, for example. Why would a merchant add new payment methods to support other digital currencies, when the majority of people use a specific one? Well, given the report was based on data from March 2017, it makes sense it would think that way.
However, looking at the graph now, we can clearly see how Bitcoin’s dominance start to waver sometime after the new year. While BTC may have controlled 72% of the total market share, nowadays that number has dropped to 43%, almost half of last year.
Finally, the intra-cryptocurrency market faces, perhaps, the hardest challenge of them all. If banks decide to take part in the fun, they could hinder the development of any other projects. Due to their economic power, banks could potentially practice predatory pricing schemes or preemptively acquire its smaller competitors.
Maybe an even harsher method would be a simple denial of service. Banks could easily block access to their platforms to exchange or wallet services. Hypothetical, they could purposely offer lower service quality, set unreasonable requirements, or simply delay their processes.
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Last modified: May 20, 2020 6:31 PM UTC