In this interview, Paul Brody, the Global Blockchain Leader at EY, shares his expert perspectives on the evolving cryptocurrency landscape. With a keen eye on market trends, regulatory challenges, and technological advancements, Brody offers valuable insights into the future of Bitcoin, Ethereum, and the broader blockchain ecosystem. His analysis spans from the impact of recent ETF launches to the long-term viability of various cryptocurrencies, providing a comprehensive overview of the industry’s current state and future prospects.

With the successful launch of other ETFs, what implications do you foresee for the broader cryptocurrency market in terms of mainstream adoption?

This is a great question that I’ve been thinking about quite a bit. First, this provides a gateway for traditional investors who are required to buy exchange-traded regulated items. It provides a point of access. However, one of my key hypotheses is that, unlike the prior round, where all crypto things went up together, this is much more of a winner-take-all situation. 

When it comes to crypto assets, there’s only going to be one significant crypto asset, and it’s going to be Bitcoin. For smart contract chains for tokenization, there’s only going to be one primary smart contract platform, and that’s going to be Ethereum. Most of the others are going to languish during this upturn. They’re not going to move up in the same way that Bitcoin and Ethereum are going to move forward.

How do you believe the SEC’s decision on the ETF will influence the future of regulatory actions, especially regarding other crypto assets?

That’s actually something that’s really interesting and a big difference between the U.S. and the European Union. In Europe, there is the Markets in Crypto Assets regulation (MiCA or MiCAR), which lays out a legal and regulatory framework for pretty much any type of crypto asset and asset-referenced tokens. The SEC’s decisions are much more specific to Ethereum and Bitcoin rather than to the general crypto-asset sector. There’s no guarantee that we will have a Solana ETF just because we had a Bitcoin and Ethereum ETF, even though people have already filed for such ETFs.

Do you expect the $1 billion ETF trading volume on the first day to be sustained, or will it fluctuate as the market adapts?

Well, yes and no. In the short run, we’re definitely not going to have lots of billion-dollar days. But in the longer term, absolutely. When you look at benchmarks like the amount of gold traded, which is a good analogy for cryptocurrencies like Bitcoin, there’s about $14 trillion of market cap in gold. 

Then there’s about $800 trillion in market cap of other tokenizable assets. So if we think about those pools of assets that could flow into Bitcoin as a kind of digital version of gold or onto Ethereum as tokenized assets, I think over the long run, the volumes are going to be much, much bigger than a billion dollars.

However, one key consideration is the timeline. If you go back to the 1950s, it took about 30 years for stocks to become a standard part of people’s investment and retirement portfolios. I think we’re in line for a similar timeline where crypto assets and tokenized assets will be a standard part of most people’s investment portfolios, but it will take about 30 years for that to go mainstream.

What are your expectations for the future interplay between cryptocurrency markets and traditional commodities?

Commodity markets are interesting because they seem to behave in ways that are specific to their purpose. Gold has carved out a place as a currency-like alternative to fiat currencies. I think Bitcoin is kind of a digital version of gold. On the other hand, Bitcoin and gold are in competition with each other. There’s a real possibility that over time if Bitcoin remains a good investment, people will prefer it for its portability and scalability.

Bitcoin exhibits many of the things that people like about gold, but it’s actually better at some of those things than gold is. For example, when the price of gold goes up, mining increases. With Bitcoin, when the price goes up, there’s no extra mining; you can’t make extra Bitcoin just because the price went higher. So, in many ways, I feel like Bitcoin is better at being a precious metal than gold. If they become in competition with each other over the long run, I think Bitcoin is more attractive.

Ethereum’s efficiency improvements were meant to reduce gas fees and lower returns on staked Ethereum. How do you think this will impact the attractiveness of staking for investors?

This is such a fantastic question. It gets to the heart of the issue that Bitcoin and Ethereum are not really the same. Ethereum is a computing platform, and like all computing platforms, it gets more efficient over time. There’s a pendulum process where advancements in performance tend to race ahead of demand. For a while, people wonder what to do with all this capacity. Then, over time, they figure it out, and suddenly we’re capacity-constrained again.

We’re currently in a period of excess transaction capacity, but it’s not going to last forever. I think most people buying into Ethereum are doing so with a really long-term view. So they’re not so bothered by the short-term reduction in staking yield and network fees.

What are your thoughts on the long-term viability of Ethereum as a platform for dApps, especially in light of the recent efficiency improvements?

Ethereum is the financial internet. It’s the internet of value. It has become the dominant smart contract platform. Unless the Ethereum Foundation and the community really screw up their stewardship of this ecosystem, I think that dominance is likely going to be here for a very long time.

What are the key factors that could influence further adoption of blockchain technologies by financial institutions?

Financial institutions are subject to a relatively high level of regulatory scrutiny. So, the most important thing you can do to drive adoption is to create a really good regulatory environment. The European Union has done an absolutely fantastic job with the MiCA regulation. It’s not perfect, but it’s very good. We’ve seen it really kick off demand and investment in Europe. The United Arab Emirates, Singapore, and Japan also have excellent regulatory environments.

The U.S. is interesting because it’s a really big market. We still see an enormous amount of demand and activity in the U.S. market. But there’s no question that it is not the super-friendly regulatory environment that we have in some other countries. 

Although I’m feeling very optimistic about it at the moment because there’s so much bipartisan commitment among U.S. politicians that once the presidential race is over and we get a new Congress, House, and Senate, there seems to be broad bipartisan agreement that constructive legislation is needed and should be passed.

Will other ETFs drive demand for similar products focused on other cryptocurrencies, and if so, which ones are likely candidates?

I don’t, mainly because cryptocurrency is a winner-take-all business. The best analogy I can give you is to look at the precious metals market. The market cap of gold is more than ten times larger than silver, which in turn is ten times larger than the next largest precious metal, and so on. Investors want one item that they can use as a financial asset or a hedge against inflation.

Bitcoin is a digital version of that, and there’s clearly no place in the market for anything else. Bitcoin is more than ten times larger than the next largest pure crypto asset, and I don’t see anybody coming close to that level any time soon. So, I personally think the answer is no. Maybe some regulators will allow other ETFs for crypto assets, but I don’t think they’ll do very well.

What are the main challenges regulators face in keeping up with the rapid developments in the blockchain and crypto industries?

It depends on the country, and there are a number of different challenges. Regulators need to think carefully about things like the role of central bank digital currencies, particularly in an environment where you’re also allowed to buy stablecoins or cryptocurrencies. They need to consider stablecoins, which I think matter as much as, maybe more than, cryptocurrencies.

How do you anticipate the crypto ETFs will affect the perception of cryptocurrencies as a legitimate asset among more conservative investors?

It’s hugely important. I can’t overstate the importance of that enough. In the short run, many funds, pension funds, and sovereign wealth funds are restricted to buying things that have been approved by regulators, and ETFs are very clearly approved by regulators. So that has a really huge impact.

In the long run, I sometimes wonder whether ETFs will be hugely successful only because there are many ways to buy cryptocurrencies and digital assets. The ETF is a way of packaging a digital asset and selling it in a traditional stock exchange market. 

It works because it gets past some of the regulatory restrictions on how people are allowed to invest. But 5, 10, 20 years from now, those rules will all be changed, and then the question will be, if you’re going to buy Bitcoin, why would you buy it on an ETF when you could just buy the actual thing? I think the answer is you’d probably just buy the actual thing.

How do you think we can attract more conservative people to crypto? How can you make a person buy an ETF?

I don’t think you can make a person buy an ETF. I come from a very orthodox economics background. Most of my investments are index funds. I personally believe that demand for digital assets will be great when you can do two things:

Assemble a large portfolio of digital assets that have clear, understandable discounted cash flows – these are companies and entities that produce yield.

Have good economic theory and data that will help you put that into a well-structured, high-performing portfolio.

The most important revolution in investing over the last 50 years has been index funds – this rigorously studied, academically proven model for safe, high-performance investing. The world will buy crypto assets or digital assets by showing that they have a place in a rigorously studied and carefully understood long-term investing strategy.

We are missing two things right now:

• Long-term studies and academic evidence to show that it can work.

• Enough entities on-chain to produce something that looks like the S&P 500 or even what used to exist in the past, which was called the NIFTY 50.

It’s still a relatively nascent sector.

What’s your outlook for cryptocurrency markets over the next three years?

Three years from now, we will look back and say, “Wasn’t it obvious that the only really important cryptocurrency was Bitcoin?”

People will look back and say we should have better foreseen how Ethereum and Bitcoin, which we were treating as kind of the same in a lot of trading and transactions, were actually very different. Ethereum was becoming a computing platform while Bitcoin was remaining as a crypto asset.

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