2022 was a whirlwind year for crypto, to say the least.
While the year started off strong, with real technological advancements and excitement about its potential, there were noticeable challenges. Overnight support in the millions to Ukraine, 1 billion donated in COVID relief, and legislative gains in the EU and Asia, were accompanied by headlines around Terra Luna, Celsius, and Three Arrows. At the end of the year, the latest revelations about FTX and the alleged criminal activity of a small group of people within the company sent massive shockwaves through the entire crypto industry. Given its importance in the space, the contagion and fallout may not be over.
If there is one message that came across loud and clear, it’s that regulatory clarity is needed – and it’s needed now.
Let me be clear about what I mean: The FTX events show that there is already a framework in place for bad actors. Sam Bankman-Fried being charged with eight distinct criminal counts shows that bad behavior in the crypto ecosystem is already subject to a variety of laws and regulations. There are (subject to the legal process) consequences when someone (or a group of someones) breaks the law. But how do we prevent something bad from happening in the first place – and what are the rules of the road for honest actors? This is the question for governments around the world in 2023.
There have been long-standing calls from the industry for regulatory clarity, but the urgency and pressure on governments are now higher than ever. While there were some who were content to sit this issue out, the events of last year make it almost impossible for policymakers and regulators not to have a view on these important topics.
What’s happened – and what’s ahead?
State of Play
It’s important that the forward progress that took place last year is not discounted or dismissed. Around the world, there were real moves toward policy frameworks that would provide a pathway for the crypto industry.
First, there was a clear recognition that international cooperation is critical. Standard-setting bodies (SSBs) and multilateral institutions made moves to bring alignment to this cross-jurisdictional technology. For example, the Financial Stability Board (FSB) released its proposal for the regulation of crypto-assets and stablecoins, the Organisation for Economic Co-operation and Development (OECD) unveiled its crypto tax framework, and the Basel Committee on Banking Supervision (BCBS) published its second consultation on the prudential treatment of crypto-asset exposure.
Second, we saw proposals for comprehensive crypto packages and strategies around the world. Europe made headlines with its passage of the Markets in Crypto-Assets (MiCA) Regulation and accompanying Transfer of Funds Regulation (TFR). Years in the making, this landmark covers a range of areas, including crypto-assets, stablecoins, and crypto-asset service providers (CASPs). We expect to see other economies looking to MiCA as an example.
In the United States, President Biden’s Executive Order on Digital Assets – issued in March 2022 – catalyzed a flurry of activity from US regulators. This included the release of several reports commissioned by the Executive Order and an overarching framework that came out
of the report findings. On the legislative side, we saw major proposals including the Bipartisan Responsible Financial Innovation Act, the Digital Commodities Consumer Protection Act, and stablecoin proposals on both the House and Senate sides. In the Asia-Pacific region, regulators in Hong Kong and Singapore released public consultations on their proposed crypto packages – and are seemingly racing to serve as the regional crypto hub. South Korea is making progress on its Digital Asset Basic Act and in Australia, government officials have an eye toward digital assets, beginning with a token mapping exercise as a first step towards a comprehensive crypto framework.
Third, we are seeing the emergence of crypto champions around the world. Looking to attract crypto talent and innovation to their jurisdictions, these leaders are really taking the time to understand the tech and where it’s headed. For instance, in the United States, the 119th Congress is seen as the “Crypto Congress” because so many members have focused extensive time and attention on the area. The United Kingdom prime minister, Rishi Sunak, is widely seen as “crypto-friendly.” Japan’s Prime Minister announced additional investment in Web3 services.
At the same time, we’re seeing the fruits of dedicated resourcing to crypto and blockchain technology. Those crafting policies and regulations have demonstrated a greater understanding of the vast diversity and nuance we see in crypto projects – especially around how differences in decisions around economic incentive design, governance, and even marketing can lead to vastly different structures and outcomes.
What I’m watching
On the policy side, it will be interesting to see how the crypto agenda fits in amidst the backdrop of a worsening economic situation and growing political polarization. As we have seen with recent events in the United States, it is looking like it will be challenging to get even the most basic packages through. What this means for a highly technical area remains to be seen. I have seen a general view from policymakers that education and understanding are needed among government actors – but whether this translates to policy will, ultimately, be a political question.
On the technical side, bear markets are historically where some of the best products have been built. “Crypto tourists” – or those who were just around for a quick buck – are exiting in droves, which allows for a level of focus on what really adds value. I am especially excited about advancements in Layer 2 scalability, zero-knowledge proofs, and account abstraction. I believe this focus on fundamentals is going to unlock the next generation of blockchain-based applications.
On the social benefit side, I think we’re seeing an increased focus on adding value to users – especially those who have been historically excluded from, or under-served by, traditional financial services. I am especially heartened by the entry of rigorous research projects focused on important issues like evaluating social impact, generational wealth-building, and expanding financial inclusion.
For industry, the focus needs to be on myth-busting and education. As the importance of crypto grows within the global economy, governments have recognized that inaction is not an option. Though this conversation is not new – the industry has been calling for regulation since 2018 – I am heartened to see increased activity. Clear rules of the road will be key to protecting consumers and facilitating innovation for the benefit of all.
The challenge, in this next phase, will be ensuring that policies and regulations are not too reactive to the news of the moment. Over-indexing on one example – and not taking the time to understand the nuances in the space – could lead to detrimental long-term effects. The crypto industry’s next big task is to focus on myth-busting and education.
All opinions expressed by the writers are solely their current opinions and do not reflect the views of FinancialColumnist.com, TET Events.