Alexandre Azoulay: “The adoption of services linked to virtual currencies will be natural and widespread”

Around the world, virtual currencies continue to emerge as an alternative to the traditional banking system, with younger generations particularly enthused about the prospect. "The adoption of virtual currency services will be natural and widespread," explained Alexandre Azoulay, managing partner of Luxembourg-based investment fund SGH Capital, whose portfolio includes several stakes in firms offering virtual currency services.

Cryptocurrency craze confirmed

In a nutshell, decentralised finance is built on user-to-user relationships, who maintain their funds in their personal wallets and conduct transactions via blockchain. This system was originally conceived as a new form of monetary exchanges, rooted in libertarian principles and marked by a powerful distrust of centralised systems and traditional banking institutions. "The generation behind cryptocurrencies is the one that grew up in the wake of the 2008 crisis, for which banks were widely blamed," Alexandre Azoulay explained. "The creation of an alternative, open-source system, in which anyone can participate, fits into this mistrust of the traditional banking and financial system," underscored Alexandre Azoulay.

A 2018 report by Jean-Pierre Landau, the deputy governor of the Bank of France, underlined that 1,600 cryptocurrencies - 1,300 according to the Autorité des marchés financiers (AMF) - are in circulation. For the moment, they are a relatively marginal presence in the European financial system, representing a mere 2.2% of all eurozone transactions—but this market share is expected to grow in the coming years.

"The crypto-currency phenomenon has now imposed itself on the various traditional financial players. For example, a good third of companies in the insurance, banking and trading sectors have already introduced services linked to decentralised finance," explained Alexandre Azoulay. The market is growing at a dizzying pace, with virtual currencies estimated to be worth $2 trillion, or 18% of the value of the world's gold reserves. Bitcoin is now ranked sixth in the world in terms of the amount of money in circulation, just behind the Indian rupee in a list evidently dominated by the dollar and the euro.

Strong interest from younger people

The cryptocurrency craze is being turbocharged by younger generations. A survey from last February indicated that 32% of young French people aged 18 to 24 had already made investments—or wished to do so— in cryptocurrencies. This figure is far higher than the national average of 17%, underlining how interested young people are in virtual currencies. "There is a generational shift: Gen Z and Generation Alpha are the main drivers of the adoption of virtual currencies, while older people, due to their attachment to the traditional banking system and their distrust [of cryptocurrencies], remain generally hostile," Alexandre Azoulay emphasized.

For public authorities, young people’s attraction to the virtual currency market is worrying. In the United States, the Financial Conduct Authority has raised caution over the risks taken by amateur investors, who are taking hazardous positions on currencies with highly volatile prices. These warnings have been echoed by the AMF in France. Younger generations’ interest in cryptocurrencies contrasts with the behaviour of older people, who prefer safe investments with low returns. "We must not constrain the younger generation and their desire to shake up the traditional banking system with overly restrictive regulations, rather we must redouble our pedagogical efforts to impart a better understanding of the risks associated with investments in cryptocurrencies," argued Alexandre Azoulay.

A buzzing ecosystem

The cryptocurrency ecosystem continues to evolve. On 7 September, El Salvador became the first country in the world to recognise Bitcoin as a legal tender, forcing financial players to accept it for payments. In parallel, new sovereign digital currency projects are regularly announced or in the experimental phase, such as the digital rouble in Russia, the e-krona in Sweden, the e-yuan in China and a planned digital euro project. But it is above all the Diem project, formerly Libra, led by tech giant Facebook, that has pushed more traditional financial players to position themselves on this burgeoning market. In June 2020, in direct response to Diem, the Banque de France announced that it was carrying out a dozen projects to test the uses of digital currencies, particularly in the field of exchanges between financial players.

France can also boast some major successes in the private sector, such as Ledger, a digital wallet in the form of an ultra-secure USB key, designed to store cryptocurrencies. Ledger just successfully raised €380 million, notably from Financière Agache, an investment fund from the group owned by LVMH CEO Bernard Arnault. There have been more unexpected winners, as well, such as Sorare, which created a fantasy football game based on the use of digital currencies. The startup, in which SGH Capital has invested since its inception, is now a partner of major football clubs and has raised 530 million euros from investors, including professional players such as Antoine Griezmann. Sorare’s successful fundraising is the largest in the history of FrenchTech and allowed Sorare, now valued at over €3 billion, to enter the rarefied club of unicorns.

Despite the growing enthusiasm for cryptocurrencies and related services, there are some concerns undermining confidence in the sector. Since 18 December 2020, industry players must obtain a registration as a Digital Asset Service Provider (DASP) from the AMF. Professionals have complained that the process to obtain a DASP registration is too long and that the documentation required by the administration is unclear.

According to Alexandre Azoulay, this situation will not prevent the market from continuing to develop. "Between the acculturation of the younger generations to virtual currencies, the vibrancy of the start-ups that are positioning themselves on this market and the growing institutionalisation by states and central banks of cryptocurrencies as a legitimate tool for exchange, all the signals are green for its future development, just like the artificial intelligence sector," Alexandre Azoulay concluded.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes