As 2022 draws to a close, it could easily be christened “Annus Horribilis” for crypto. This year saw the industry experience crippling collapses that brought its core foundations into question. Some of the more salient misfortunes were the spectacular failure of Terra Luna and the FTX exchange.
These events triggered investigations into the circumstances surrounding the billions of dollars worth of losses. FTX CEO Sam Bankman-Fried has been formally arraigned on several counts, including securities and commodities fraud. Such charges bring the inevitable clash of regulations and the crypto sector to the fore.
Despite the catastrophic last three quarters of the year, leading industry protagonists are looking into the future with optimism. The likes of Ethereum’s public face, Vitalik Buterin, and Binance CEO Changpeng Zhao will have to achieve growth with more robust regulatory scrutiny than ever.
Will The Crypto Crash Continue Into 2023?
Even though cryptocurrencies like Bitcoin have many dimensions, coin prices are what really make the headlines. 2022 was a terrible year, with most major cryptocurrencies losing more than half their value at the start of the year.
If we are to go by recent history, the last crypto collapse lasted from February 2018 to around November 2020 before another significant rally commenced. This timeline of over 18 months saw plenty of fraudulent ICOs go bust, hundreds of altcoins disappear, and industry incumbents reclaim their leading roles. By that historical indicator, the crypto market contagion and lack of market confidence will stretch into 2023.
Bitcoin has got a bit of stability at the $15 to $20k mark. Ethereum (ETH) has also had a sustained spell at around $1,200. These two are the industry standard bearers, and even though the entire industry suffered a rout, they remained relatively resilient.
Macroeconomic indicators are still uncertain. Inflation is high internationally, and interest rates are rising in major markets. Crypto has yet to prove to be an alternative asset class without correlation to equities markets, as some hoped it would become. The crash of stock markets in March 2020 saw Bitcoin prices crater while the advent of cheap money during COVID relief spending proved a windfall for cryptocurrencies. Therefore, prolonged economic stagnation into 2020 will not benefit crypto markets.
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Even in an apocalyptic scenario with a crypto Armageddon, Bitcoin will remain the foothold for industry believers. When trust is low, incumbents consolidate their positions. This also applies to exchanges, with Binance emerging as the clear leader among centralized exchanges. Even so, Slava Demchuk, founder of AMLSafe, said people should stop judging individual projects, creating tribalism since all projects, Bitcoin, Ethereum, and others “ bring innovation and contribute to the development of the whole crypto ecosystem.”
Possible Regulatory Developments
Incidents of investor losses and outright fraudulent conduct inevitably trigger calls for regulations. 2022 has seen more than $2 trillion wiped out from cryptocurrency markets and such losses mean that regulators have more public support. Vitalik Buterin termed Terra Luna’s collapse as a big step backwards for decentralization and trust in this sector. That said, consumer protection needs to be balanced with nurturing innovation. On this front, Mohammed Alkaff Alhashmi, Islamic Сoin CBO, thinks better monitoring and integration of AI for faster transaction analysis can translate to better security.
“ I believe identifying professional and trusted third parties who are recognized by monitoring authorities can reduce the risk and furnish the way to getting AML and KYC more robust and reliable instead of doing it internally or outsourcing it to untrusted or weak parties. Meanwhile, I can see some great techs that use AI and ML to analyze the transactions flow and wallet behaviors, helping to make blockchain apps more secure, and it provides good quality analysis to identify unwanted shady transactions.”
The fundamental problem with crypto regulation is its fragmented nature. Most countries have scant regulatory frameworks, and the legislation is often derived from general financial regulation. There could be some gains from reasonable regulations for an industry working to regain trust.
Legislative Action Expected In 2023
Most analysts expect to see regulators tighten their scrutiny next year. The collapse of FTX drew comparisons to the infamous Enron meltdown, one of the worst cases of corporate mismanagement in history. The US House of Representatives Financial Services Committee held hearings on FTX collapse in December 2022, and investigations will go on through the start of 2022.
American self-regulatory corporation Financial Industry Regulatory Authority (FINRA) started researching crypto marketing practices after FTX collapsed in November. They will likely release policy proposals next year, with lawmakers in the US ready to listen more than ever.
Policymakers have the ball in their court. Preventing another FTX-style collapse will be crucial. Even the Bank of England’s deputy governor has called for regulation to prevent such eventualities and ensure stablecoins actually serve their purpose. Top us financial policy official, Janet Yellen, has advised that customer funds should be segregated from company assets, a murky area for many crypto exchanges.
Stablecoins will be one of the fascinating regulatory areas. Terra Labs founder Don Kwon is still a fugitive from justice, but the collateral effect of his project’s crash is still being felt. Republican congressman Patrick McHenry co-sponsored a bill creating a licensing regime for stablecoins that should come up for debate in 2023.
It is this skepticism on stablecoins’ audit and their reserves that Sebastian Menge, Co-founder of Fitburn, said governments should take the initiative to thoroughly audit projects before they deploy:
“Just as many policy experts have suggested, every protocol is supposed to go beyond just a private security audit from third-party providers to government approval before launching. A unit within the cyber-intelligence unit of every government regulatory agency is supposed to vet a Web3.0 platform before it opens its services to the general public. While this might be an extreme measure, knowing that they will have to be accountable to regulators before going live will guide innovators into building a strong platform in the first place.”
Europe is also a crucial jurisdiction for crypto. 2023 should see a concerted effort to push through the Markets in Crypto Assets (MICA), which will provide a broad framework for regulating the industry. It covers aspects like money laundering, corporate standards, and consumer protection. Significantly, the bill has provisions for stablecoin issues to hold reserves and for crypto mining companies to disclose energy consumption.
The Outcome Of Existing Litigation Will Be Crucial
The default action tool for agencies like the Securities and Exchange Commission (SEC) has been litigation. Notably, the SEC has sued the likes of Ripple Labs and Telegram Open Network (TON) in the past and got significant settlements. In the current criminal case against Bankman-Fried, he will also have to answer a civil complaint of securities fraud by the SEC. Such litigation will continue even as lawmakers get their act together.
Celebrities like Kim Kardashian have also faced lawsuits for misleading promotion of crypto products. The SEC and similar regulators will continue to use litigation in 2023. Notable exchange Celsius also filed for bankruptcy in courts, and settlement of such filings will continue into 2023 as several crypto startups are still in bad shape from 2022.
Conclusion
Part of why it is so challenging to regulate crypto is that this industry has finance and tech dimensions. Creating new regulations has to be flexible enough to accommodate the dynamism of this industry but strong enough to control criminal conduct. Lawmakers and related regulatory bodies have a delicate balancing act in ensuring they meet their desired ends. Members of the broader crypto community hope that the outcome will be tenable for both sides even as this sector seeks to bounce back in 2023
