We have seen the devastating events of 2022 leave their mark on the flow of time sweeping across the cryptocurrency market. Many predicted that the market failures witnessed throughout last year would spell the doom of the industry and irreversibly erode user trust. However, with blockchain technology undergoing adoption and related developments underway, the market recovery is bringing investors back into the market.
2023 is going to be a year dominated by global regulators' activity, the growing demand among investors for auditable platforms and a series of large mergers and acquisitions. We can expect to see more Wall Street companies announcing the partnership and purchasing deals with blockchain providers.
Black Swan Lake
The crypto market remains a highly fragmented, but isolated space, suffering from its lack of cooperation, coordination, and standardization. The impact of this fragmentation is felt worst by the users, who are forced to cope with massive financial losses. Chainalysis reported that 2022 was the most lucrative year for hackers, topping the $3.8 billion mark, up from $3.3 billion the year before. And this is just a figure illustrating the amount of funds stolen. Bear in mind that some fraudsters are still operating in the blockchain space unseen or under the guise of seemingly credible projects.
With the development of the cryptocurrency ecosystem, security issues have become the top concern in the industry. The ongoing spread of the industry in Web3 space is also creating new vectors of attack that should be considered and sealed before they are exploited. Add to that the lack of a comprehensive global practices playbook on blockchain security and we get an “each man for himself” scenario that does not do justice to users.
2022 has seen the biggest collapses of such seemingly indomitable giants as 3AC, FTX, and Terra/Luna. The allegations surrounding the collapse of FTX and the $250 million anonymous bail of its founder — Sam Bankman-Fried, are good illustrations as to why the involvement of regulatory authorities is justified. As such clay-legged industry pillars collapse, people are inevitably starting to rethink the necessity of regulation and the internal compliance of fast-growing companies. But the past is past and industry players, and users, should look ahead into the future, which promises new developments. Considering the practice and experience gained, we can expect that exchanges, DeFi infrastructures and other market players will become more reliable, transparent, and regulated, thus fostering a more attractive environment.
Regulate This, Regulate That
The aforementioned events are reverberating into 2023 with voices calling for a complete regulatory overhaul of the crypto industry, or even the dismantling of existing infrastructures in hopes of ushering in a revival. If regulation is lacking, it is logical to expect companies to believe that a ‘laissez faire’ scenario is in play and start operating unchecked. There are, however, some positive byproducts that have been extruded from the bitter experiences of 2022.
The importance of regulating the crypto industry cannot be underestimated, since the presence of a legal framework that can be called upon for accountability is what gives investors peace of mind in their market operations. The lack of a unified and generally accepted legal framework related to the cryptocurrency industry is undoubtedly the main deterrent for large-scale entry into the sector on the part of institutions. With little or no support from the authorities of smaller states in cases of fraud, investors are forced to turn to international legal criminal practice only to find that the legal aspects thereof related to cryptocurrencies are so fragmented and moot that the effort of recuperating lost funds seems almost futile.
A positive trend is the general desire of leading countries to strengthen the regulation of cryptocurrencies. MiCA and the Biden Regulation framework are good starting points, but the increasing de-globalization of the world’s economy is leaving little room for said legal documents to have an all-encompassing force. Brazil seems to be leading in terms of licensing regimes, followed by the UK with its Financial Services and Markets Bill, both of which outline the legal framework of operations for crypto companies in said jurisdictions. Africa is likely to become a leader in legalizing crypto along with the Arab world, especially Dubai, which is spearheading the charge to create a favorable environment for crypto investors.
Сybercrime is also becoming a point of focus for more users who are asking for insurance agreements that can be implemented on-chain, or via a security platform that would monitor the entire life cycle of a project, given that audits are no longer credible. In essence, this is a step towards greater centralization of the decentralized industry, but that seems to be the only way of ensuring compliance with regulation and accountability, regardless of the blockchain’s core technical features.
The vulnerability of custodial wallets has rightfully strengthened users’ security awareness of asset storage. The result was a considerable increase in the number of non-custodial and hardware wallet users. With trust and optimism gradually coming back into the market, centralized exchanges remain the first place new users go when they want to trade digital assets. The reasons behind it are their extensive range of features and the convenience they provide in accessing Web3, trading, and other facilities. Such platforms are rightfully expanding to give their users more opportunities of exploring the possibilities of decentralized space with the help of an accountable and credible centralized service.
More Mergers and Acquisitions
Along comes a reality of the market that often remains neglected, but is in fact a fundamental building block of business. Mergers and acquisitions are vital for keeping business processes going, recirculating brands, and keeping the competition bar high. With the FTX collapse having shattered the crypto space, numerous companies are now scrambling to pick up the pieces and grab a share of the fragmented giant’s many businesses left unattended. Mergers and acquisitions have grown both in number and transaction volume in recent years, with players from Wall Street being among the most active participants. Examples of internal market moves can be found in Binance’s acquisition of CoinMarketCap and the frenzy around Coindesk.
As volatility wanes, the prices of cryptocurrency companies stabilize and rise with the overall increase in market capitalization. For instance, the Bitget exchange received several acquisition offers from various companies from diametrically different industries over the years, the most generous being from businesses having no brush with the world of crypto. Financial companies seeking to make an entry into the cryptocurrency market are eager to buy up suitable blockchain-based infrastructures, but the companies that have something to offer will not be in a hurry to part with their assets. The coming three to five years will be crucial and are likely to witness the biggest M&A deal in business history, and it will come from the world of cryptocurrencies.
Outlooks And Forecasts
As centralization continues to dominate in 2023, it is becoming clear that governments will be playing a key role in the development of the crypto industry. The growing polarization of the global economy, and its focus on nationalization with a deviation from the US Dollar as a reserve currency, is pushing for the introduction of CBDCs for international settlements. The deployment of CBDCs will likely have a colossal impact on the crypto market, as it will erode the influence of independent stablecoins and cryptocurrencies by detracting users towards state-backed and secured digital assets with low volatility. By the beginning of 2023, about a dozen CBDCs were launched, with 17 projects in pilot mode and another 72 under development.
Liquidity is vital for the crypto market, so many are looking at BTC and ETH ETFs as a solution. The adoption of said instruments could affect the exposure of traditional investors to cryptocurrencies. If Bitcoin ETFs are approved, the market could see a revival in 2023 with a fresh injection of investor confidence on regulatory grounds.
Lastly, the definition of cryptocurrency in countries dominated by the United States and the introduction of related bills may have a great impact on the entire cryptocurrency market. Should the US release a Dollar-backed CBDC, the global crypto playing field will be significantly reshaped and many states will have to adjust their CBDC programs to remain competitive or wrap them up altogether.