Crypto winter hasn’t slowed innovation in many areas, but others need reform and regulation
The collapse of FTX in November 2022 put a capstone on a terrible year of failures and lost market value in the world of digital assets. Did this prove that the whole crypto boom was just a speculative bubble or even a scam? Can serious people in finance now disregard the sector?
The short answer is no – and that’s a good thing. Many parts of the sector show real promise for useful innovations to provide more efficient and effective financial products and services for businesses and consumers. The calamities of the past year revealed major flaws in the business models and practices of many crypto ventures, notably in the exchange and lending spaces, but they did not reflect fundamental weaknesses in the industry’s underlying technology or its ability to transform many areas of financial services.
The challenge ahead – for digital asset businesses, investors, developers, policymakers, and consumers – is to focus on that promise, identify and rectify the flaws, and develop rules of the road (both formal and informal) that offer protections for investors and users while fostering truly valuable innovation.
How will that play out in 2023 and beyond? We expect innovation will continue in most areas of the digital asset ecosystem. There is strong potential for growth in stablecoins for use in real- world payments, especially if regulators set rules for the reserve backing of these coins, as officials around the globe are starting to do. Governments are stepping up their exploration and development of central bank digital currencies, or CBDCs. Banks are increasingly looking to tokenize deposits to provide faster and cheaper payments, and to tokenize traditional financial assets to reap major efficiencies in clearing and settling transactions. Decentralized finance, or DeFi, shows promise to transform capital markets more broadly if the right safeguards are applied, as we explained in a recent joint paper.
At the same time, the past year’s events highlighted the need for reform in some sectors such as exchanges and lending. We expect regulators in many countries will put in place a range of new investor protection requirements to prevent further blow-ups like the failures of FTX and crypto lenders like BlockFi, Celsius Network, and Voyager Digital.
Crypto markets also need a good dose of self-help. The culture of digital asset firms and stakeholders must evolve for the sector to prosper safely. Firms also need to cooperate more actively with each other and regulators to develop the common standards and frameworks that are critical for digital assets activities to achieve real scale.
Investment and speculation in cryptoassets took a big hit during the recent crypto winter but investment will not vanish, judging by the 40% rebound in the crypto market’s capitalization in 2023, as of Feb. 16. ...
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