In contrast to the all-time highs that brought its valuation to US$3 trillion in 2021, crypto has had a drastically different 2022. After all, the reliance on and skyrocketing interest in digital for the past few years throughout the pandemic resulted in users flocking to the industry, amid celebrity endorsements and million-dollar sports sponsorships. While the tide has certainly turned since then, there are still some achievements to celebrate in 2022.
This year, the market saw global adoption remain above pre-bull market levels — with special mention going to emerging markets across Asia which dominated the Chainalysis’ Global Crypto Adoption Index. Meanwhile, the entire industry waited with bated breath as the long-awaited Ethereum “Merge” took place with success.
With the end of the year as a time for reflection, such milestones seem a world away. Collectively, the industry needs to acknowledge its mistakes and missteps in the hopes of restoring trust and confidence in the sector in the year to come. So, let’s take a step back and reflect.
The Great Crypto Meltdown
A technological feat that once again failed to meet its promise was that of algorithmic stablecoins — a “two-coin” system in which the stablecoin relies on smart contract-based algorithms to reduce the price volatility of its underlying asset. Let’s go back to the early days of spring, when the TerraUSD (UST) stablecoin lost its peg to the US dollar and its companion token LUNA, designed to stabilise USDT’s price, fell from US$80 to mere cents. The result? US$60 billion evaporated into thin air, leading to devastating losses among retail investors across the globe, including those who had invested their life savings, lured by the promise of earning 20 percent yield on their UST holdings.
And the contagion spread, as Singapore-domiciled crypto hedge fund Three Arrows Capital suffered heavy losses to the tune of US$3 billion and found itself unable to repay lenders and other counterparties. Bankruptcy filings ensued across the industry. Now, one of the platforms that lent a hand to embattled industry players is facing an even worse fate. This November, digital asset exchange FTX collapsed in 10 daysafter it misused customer funds, resulting in a solvency crisis and the industry’s very own “Lehman moment”.
Much like the global financial crisis of 2008 that influenced the genesis of bitcoin, regulators are now paying closer attention. Lawyers and legal advisors to crypto companies are in agreement that the FTX debacle serves as a wake-up call for the industry which is now far too big for a ‘wait and see’ approach to enforcement. A more robust regulatory regime is the only way for trust to be rebuilt while ensuring consumer protection.
Not-So-New Kids on the Block
Yet, not all is lost amid the chaos. In spite of the bear market and the ongoing crypto winter, institutional interest in digital assets remains strong. Fidelity Digital Assets’ Institutional Investor Digital Assets Study found that 75 percent of its surveyees plan to invest in the future. These findings come on the back of major TradFi players such as BNY Mellon and Goldman Sachs doubling down on the industry. Booms and busts aside, institutional players are now recognising the value and legitimacy of the asset class — but is this what the crypto market needs?
Historically, crypto was lauded as a sufficiently decorrelated asset, allowing investors to diversify their holdings to better mitigate the effects of global macroeconomic events. For the past few years, crypto assets began to exhibit a stronger correlation with traditional equities due growing demand and participation from institutional investors with high exposure to traditional markets, especially in Asia, and this only further intensified this year. While this certainly points to a sign of market maturity — after all, the more players, the better — some have argued that this has harmed the very proposition that crypto sought to offer, as an entirely new financial system removed from the one we’ve lived with for centuries. However, it can’t be denied: the inflow of such capital is undeniably what the industry has needed for a long time, propelling it to new heights and funding the new innovations we see today.
Years on, mindsets need to evolve — both TradFi and crypto (be it DeFi or CeFi) stand to learn a thing or two from one another. In fact, Christy Goldsmith Romero, a commissioner at the Commodity Futures Trading Commission, has expressed that the guidelines that govern TradFi can act as a reference point for crypto. In perhaps one of the most progressive moves of the year, the Monetary Authority of Singapore engaged domestic banking players under Project Guardian to launch a series of pilots focused on identifying potential uses for DeFi innovations in today’s financial system. This past November, several banks piloted a live trade of tokenised Singapore Government Securities, Singapore dollars, Japanese government bonds, and Japanese yen across permissioned DeFi liquidity pools on Uniswap. It’s evident that the learning is two-fold — both TradFi and crypto stand to learn a great deal from one another.
Looking ahead, it’s clear that a commitment to safety, security and compliance is no longer a luxury, but a necessity for the industry to secure its long-term growth. These are just some of the fundamental principles that crypto should further inculcate among projects in order to shed its reputation as the Digital Wild West.
Restoring and rebuilding trust
Rome wasn’t built in a day – and neither is the crypto industry. As regulators struggle to keep pace with the staggering rate of innovation, gaps remain — and industry players will need to take it upon themselves to strike a collaborative tone. In many ways, what the crypto industry is experiencing now is similar to what capital markets experienced — and are still experiencing since its inception in the 17th century.
In Asia, Singapore continues to pioneer its sandbox approach through controlled pilots backed by its financial regulator to explore the benefits of blockchain and digital assets. Meanwhile, Hong Kong has sought to regain its status as a financial hub by proposing that it would legalise the participation of retail investors in crypto trading and in the trading of crypto exchange-traded funds. Elsewhere, the European Union intends to vote on its Markets in Crypto-Assets (MiCA) regulation next February to standardise policing and enhance the customer protection frameworks for all crypto-asset service providers within the bloc. In the US, scrutiny is mounting against exchange players following the FTX collapse, with major firms such as Binance and Coinbase now being questioned by regulators such as Ron Wyden, Chairman of the Senate Finance Committee, to explain their business structures and customer protection policies.
As we collectively look back on 2022, we’d do well to remember the industry’s nascency — we have a lot to learn and a long way to go. As an industry, we can’t afford to make the same mistakes of Big Tech and TradFi which, in some cases, thrived in opaque systems at the expense of their users and customers. Armed with blockchain’s ability to provide an immutable and public ledger, 2023 needs to be the year that we do better — transparent governance and doing right by one’s customers needs to be the norm.
About the Author
Eddie Hui is the Chief Operating Officer at MetaComp. Based in Singapore, Eddie has over 20 years of experience in the financial industry, working for Société Générale for the bulk of his career. In 2008, Eddie started working in front office functions, successively occupying the roles of COO for the Proprietary Trading activity; COO for Fixed Income Credit and FX; COO for Prime Services; and more recently, COO for the Equity Market Making desk, operating out of Hong Kong. Eddie’s experience in traditional finance and his passion for cryptocurrencies enable him to bridge the gap between these two environments as he engages with institutional clients on behalf of MVGX. Eddie graduated in 1999 from ENSEEIHT (Ecole Nationale Supérieure d’Electrotechnique, Electronique, Informatique, Hydraulique de Toulouse) with a Master of Science in Engineering. Eddie is also the COO of MVGX, a digital green exchange licensed and regulated by the Monetary Authority of Singapore.
