By Eddie Hui, Chief Operating Officer, MetaComp
Contrary to the all-time highs that took its valuation to $3 trillion in 2021, crypto had a vastly different 2022. Finally, confidence in, and soaring interest in, digital over the past few years during the pandemic meant that users flocked to the industry in droves amid celebrities and multi-million dollar sports sponsorships. Even if the tide has certainly turned since then, there are still some successes to be celebrated in 2022.
This year, global market adoption has remained above pre-bull levels – with special mention of emerging markets across Asia, which have dominated Chainalysis’ Global Crypto Adoption Index. Meanwhile, the entire industry waited with bated breath as the long-awaited Ethereum “merge” took place successfully.
With the end of the year being a time for reflection, such milestones seem worlds away. Collectively, the industry must acknowledge its mistakes and missteps in hopes of restoring confidence in the sector in the year ahead. So let’s step back and think.
The Great Crypto Meltdown
One technological feat that once again fell short of its promise was 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. Going back to the early days of spring, when stablecoin TerraUSD (UST) lost its peg to the US dollar and its companion token LUNA, designed to stabilize USDT’s price, fell from $80 to just pennies . The result? $60 billion went up in smoke, causing devastating losses for retail investors around the world, including those who had invested their savings lured by promises of a 20 percent return on their UST holdings.
And the contagion spread as Singapore-based crypto hedge fund Three Arrows Capital suffered heavy losses of $3 billion and found itself unable to repay lenders and other counterparties. Bankruptcy filings were filed across the industry. Now, one of the platforms that has lent a hand to embattled industry players faces an even worse fate. This November, the digital asset exchange FTX collapsed in 10 days after misusing client funds, leading to a solvency crisis and the industry’s ‘Lehman moment’.
Much like the 2008 global financial crisis that affected the emergence of Bitcoin, regulators are now paying closer attention. Attorneys and legal advisers from crypto companies agree that the FTX debacle serves as a wake-up call for the industry, which is now far too big to wait and see on enforcement. Only a more robust regulatory system can restore confidence while ensuring consumer protection.
Not-so-new kids on the block
But all is not lost in the chaos. Despite 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 respondents plan to invest in the future. These insights come from major TradFi players like BNY Mellon and Goldman Sachs doubling down on the industry. Booms and busts aside, institutional players are now realizing the value and legitimacy of the asset class – but is this what the crypto market needs?
Historically, crypto has been hailed as a sufficiently correlated asset that has allowed investors to diversify their holdings to better mitigate the impact of global macroeconomic events. In recent years, due to growing demand and participation from institutional investors with high exposure to traditional markets, particularly Asia, crypto assets have started to show a stronger correlation with traditional equities, and this has only intensified further this year. While this certainly hints at a sign of market maturity – the more players the merrier – some have argued that this has hurt the very supply that crypto has sought to offer, as an entirely new financial system has been removed from the one we’ve lived in for centuries However, it cannot be denied: the influx of this capital is undoubtedly what the industry has long needed to propel it to new heights and fund the new innovations we see today.
Years later, mindsets need to evolve – both trad-fi and crypto (be it DeFi or CeFi) will learn a thing or two from each other. In fact, Christy Goldsmith Romero, an officer for the Commodity Futures Trading Commission, has expressed that the policies governing TradFi can serve as a reference point for crypto. In perhaps one of the most progressive moves of the year, the Monetary Authority of Singapore commissioned domestic banking players as part of Project Guardian to launch a series of pilot projects focused on identifying potential applications for DeFi innovations in today’s financial system. Last November, several banks conducted live trading of tokenized Singapore government securities, Singapore dollars, Japanese government bonds and Japanese yen via eligible DeFi liquidity pools on Uniswap. It’s obvious that the learning is twofold – both TradFi and crypto can learn a lot from each other.
Looking ahead, it is clear that a commitment to security and compliance is no longer a luxury, but a necessity for the industry to ensure its long-term growth. These are just some of the core principles that crypto should continue to inculcate on projects to shed its reputation as the digital wild west.
Restore and rebuild trust
Rome wasn’t built in a day, and neither was the crypto industry. As regulators struggle to keep up with the staggering rate of innovation, gaps remain – and industry players must take it upon themselves to strike a collaborative note. In many ways, what the crypto industry is experiencing now is similar to what the capital markets have been experiencing — and are still experiencing since its inception in the 17th century.
In Asia, Singapore continues to pioneer its sandbox approach through controlled pilots supported by its financial regulator to explore the benefits of blockchain and digital assets. Meanwhile, Hong Kong has attempted to regain its status as a financial hub by proposing to legalize retail investor participation in crypto trading and crypto exchange-traded fund trading. Elsewhere, the European Union plans to vote on its Markets in Crypto Assets Regulation (MiCA) next February to standardize policing and improve customer protection frameworks for all crypto asset service providers within the bloc. In the U.S., scrutiny of stock exchange players is increasing in the wake of the FTX collapse, with big firms like Binance and Coinbase now being questioned by regulators like Ron Wyden, chairman of the Senate Finance Committee, to explain their business structures and customer protection policies.
As we look back at 2022 together, we would do well to remember the genesis of the industry – we still have a lot to learn and a long way to go. As an industry, we cannot afford to make the same mistakes as Big Tech and TradFi, which in some cases thrived in opaque systems at the expense of their users and customers. Armed with the blockchain’s ability to provide an immutable and public ledger, 2023 must be the year we do better – transparent governance and the right behavior towards customers must be the norm.
About the author
Eddie Hui is Chief Operating Officer at MetaComp. Eddie lives in Singapore and has over 20 years of experience in the financial industry, having worked for Société Générale for most of his career. In 2008, Eddie began working in front office roles, successively filling the roles of COO for the Proprietary Trading activity; COO of Fixed Income 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 allow him to bridge the gap between these two environments when working with institutional clients on behalf of MVGX. Eddie graduated from ENSEEIHT (Ecole Nationale Supérieure d’Electrotechnique, Electronique, Informatique, Hydraulique de Toulouse) in 1999 with a Master of Science in Engineering. Eddie is also COO of MVGX, a digital green exchange licensed and regulated by the Monetary Authority of Singapore.
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