Centralized exchange woes
The most shocking news for users and crypto enthusiasts came from centralized exchanges in 2022, but let’s dive into some background information first.
Interest in crypto was best reflected through the all-time highs achieved by Bitcoin (BTC) and Ethereum (ETH), the proliferation of decentralized finance (DeFi) and the rush into non-fungible tokens (NFTs). Similarly, centralized finance (CeFi) exchanges saw a great deal of growth, but also some troubling developments.
With the tightening of liquidity by Central Banks, crypto markets started selling off. This led to an unwinding of leveraged positions. The next blow came from the implosion of projects like Terra. With this background, CeFi institutions were struggling to have enough funds on the books as they too were overleveraged, which led to quite a few “bank runs” in 2022.
Among the most notable implosions, whose consequences are still being felt in the crypto space, are the collapse of the Celsius Network, Voyager Digital and FTX exchange. Experts saw the collapse of FTX as the final nail in the coffin of crypto, expecting further sell-offs.
Regulation takes center stage
With such a troubling background and chain of events, voices touting regulation of crypto markets grew louder. 2022 also saw an increase of fraud, theft and irresponsible behavior by exchanges that created a tough investing environment. The release of Markets in Crypto-Assets (MiCA) provisional agreement in the EU and the Framework for International Engagement on Digital Assets in the US signaled that changes are coming to the crypto space.
However, no specific regulatory framework has been actually set either by the EU or the US, there are developments. Namely, the EU is looking to introduce a regulatory framework at an EU level. The aim would be to protect investors, preserve financial stability, while allowing innovation for which the crypto space is known for.
Regulation in 2023 and beyond
Right now, trust in the space is broken. Regulation by itself will not solve all of the problems crypto has faced so far. However, clarity around regulation and its application, improving risk management capabilities and procedures, will be a good starting point for crypto to become what it was originally intended to be.
Global standard-setters are pushing for international cooperation when it comes to crypto. Their justification lies in the fact that crypto is more and more interconnected with the traditional financial system and as such, could pose a significant risk to financial stability.
Despite their desire to regulate crypto, the speed of adoption and innovation in the space seems to be posing insurmountable obstacles. Namely, regulators are for now, playing catch up, struggling with the skill gap the staff has, which is widened by the day thanks to crypto’s dizzying speed of evolution. We expect this to continue throughout 2023, while some regulation surrounding stablecoins could come in the second half of 2023.
Below you can see crypto regulation in 2022 at a glance.
Source: PwC
4 trends that could shape 2023
While 2022 was certainly tough, the start of 2023 has brought some recovery to crypto markets. With that, we are confident enough to predict the following 4 trends that could shape crypto in 2023.
Government adoption
With the tightening of crypto regulation, more central banks may look to introduce their own digital currencies. The speech given by the European Central Bank President Christine Lagarde clearly stated that the EU sees digital assets as an integral part of the future.
“The digital euro is more than just a Eurosystem initiative, it is a common European project”.
On the other hand, the collapse of FTX may see governments introduce their own exchanges, which will be more regulated and backed by the issuing state. For example, Indonesia is looking to launch a national crypto exchange this year, and this could be a start of a wider trend.
AI to play a role in cryptocurrencies
With the ChatGPT AI taking the world by storm and already setting the main world topic for 2023, it is difficult to imagine a future where AI will not influence crypto in some way. Some crypto tokens linked to the AI niche have seen a strong growth in 2023, mostly thanks to the increasing speed of neural networks used to process data (audio, video, text). For those interested to dig deeper, take a look at the Fetch.AI and SingularityNET projects in the crypto space, and definitely check out ChatGPT.
More ETH upgrades
The Merge defined 2022 for ETH, however, a new update dubbed “Shanghai” awaits Ethereum in 2023. This upgrade will allow users to withdraw staked ETH. What do we mean by this? The Merge allowed users to stake existing ETH inside the Ethereum network to verify Ethereum transactions and generate new ETH. So far, users were not able to withdraw their staked ETH or the newly created one.
Once users get this ability, we may experience some volatility in ETH price. The new upgrade is expected in March 2023, so keep an eye on the price of ETH towards the close of the first half of 2023.
And before we forget, ETH developers discussed another hard fork that could occur towards the end of 2023, but more on that after the Shanghai upgrade.
On-chain Real-world Assets (RWA)
Projects like Ondo Finance might be an overture into unlocking significant liquidity and utility in the real world by bringing RWA on-chain. Ondo does this with treasury and corporate bonds, digitalizing them and putting them in the DeFi ecosystem, to offer investors higher returns.
There could be a significant infusion of capital into the broader financial markets if RWA projects that loan out stablecoins are developed. Furthermore, bringing ownership contracts and buy and sell contracts on-chain could further spur the growth of the crypto space and streamline processes in the real world.
Conclusion
As we move into 2023, investors and crypto enthusiasts should be aware of the broader economic environment, lack of enforceable regulation and diminishing confidence in crypto all caused by developments in 2022. While all of this will not be easily solved, we see innovation and progress continuing to grow. For those looking to invest, we would suggest checking their portfolios, the investment thesis they have behind their allocations and also set a plan for future price swings. If there is anything certain in the crypto space, that is the price volatility that is inevitable.
