Labelled the crypto winter, the cryptocurrency market went through a roller coaster ride last year. In 2021, riding on the crypto frenzy wave, the poster boy of the crypto industry, Bitcoin, soared from an all-time high of US$65,000 in Nov 2021 to a low of US$15,869 a year later.
The FTX scandal last year made a big dent in the crypto industry, exposing the vulnerability in dealing with cryptocurrencies and engaging with digital asset exchanges (DAXs).
The irony is that FTX was not a small player in the crypto market and was popular among investors, venture capitalists, politicians and even in the regulatory space. FTX collapse has sent a strong signal to crypto enthusiasts – if FTX can collapse, all other DAXs could be vulnerable.
In fact, FTX was the 11th in a series of 2022 crypto shakeouts which continue to happen with the more recent collapse of Miami and New York’s crypto Citycoins. This will dent the confidence of crypto enthusiasts and innovators, causing more DAX to lose customers and the trust they have built over the years.
On the positive side, the FTX collapse has again woken up the regulators, and better regulation is now underway. ECB and Federal Reserve regulators long broadcasted the importance of strong regulations for the crypto market.
ECB noted that even though crypto assets comprise a small share of about one per cent of the total global financial asset, which is still more than sub-prime mortgages. If left unregulated, they can wreak havoc leading to financial stability risks.
To avoid that, ECB has finalised legislation, Regulation of Markets in Crypto-Assets (MiCA), which is expected to effect in 2024 and will harmonise the regulatory approach across the European Union (EU). While Federal Reserve Board warned member banks that it intends to prohibit cryptocurrency banking activity to avoid banks getting exposed to crypto risk.
Regulators are not here to stifle crypto innovation but rather to let them develop in a protected ecosystem. In fact, Fed’s Vice Chairman noted that digital assets specialists are needed to “help us learn from new developments and make sure we’re up to date on innovation in this sector.”
Regulators are taking prudent measures to avoid crypto risk being transmitted to a larger part of the economy. For instance, Federal Reserve Board warned member banks that it intends to prohibit a large portion of cryptocurrency banking activity presumptively. The Fed prohibits member banks from holding most crypto assets.
Banks wishing to utilise dollar tokens must prove certain security measures and receive formal approval before their use in banking transactions. While in the UK, NatWest and other large UK banks have imposed limits on how much money can flow to and from crypto exchanges.
At times, crypto regulations can be ambiguous. The Securities and Exchange Commission (SEC) has put leading crypto exchange Coinbase on notice for breaking securities laws. Coinbase was once approved by the same SEC to go public in 2021, having deeply reviewed its operation.
Unfortunately, we haven’t seen unified crypto regulations emerge in the 13 years of its existence. The challenge is not to impose regulatory standards on the nature of crypto while creating a safe environment for crypto lovers. Regulators should not implement extreme solutions discouraging innovation, such as digital currency or tokens.
More restrictions on banks dealing with cryptocurrency mean it will be difficult for the DAXs to keep customers’ crypto holdings safe. While at one end, we want to make the crypto economy sound, vibrant and safe, tighter regulations are also making crypto players move from a regulated system to offshore locations, where keeping an eye on crypto investment will be a challenge.
The million-dollar question is what will happen to the crypto industry next. 2023 will be the year of reset and regulated crypto industry. Regulators must make a unified and coordinated effort to safeguard the crypto ecosystem. No doubt, crypto is here to stay, but with increased regulation, it will be less volatile, less speculative and more attractive as an alternative financial asset. Regulation will keep the FTX saga from happening again.
There will be further innovation in the token market and more focus on stablecoins than cryptocurrencies. Not to forget, the hype surrounding the Central Bank Digital Currency (CBDC) is an offshoot of crypto technology. DAXs will come under stricter scrutiny, prompting people to hold their investments for longer and bringing price stability to the market. I anticipate Bitcoin to trade in the range of USD 25-30k.
Two weeks ago, my prediction was half of it, but due to recent banking turmoils, many investors and speculators would be keen to invest in crypto, giving a much-needed sustained lifeline to the crypto industry. Precise and progressive regulation will shine the industry more and pave the way for Crypto spring. The crypto players need to improve transparency, build trust, reduce or remove bad actors and implement robust risk management practices at Crypto exchanges so that investors and regulators feel safe about the crypto economy.
