Bitcoin (BTC), the flagship cryptocurrency, has fallen from a high of nearly $70,000, which it reached in late 2022, to just over $20,000 at the time of writing. Meanwhile, Ethereum (ETH), the second-largest crypto-asset by market cap and the largest smart contract platform, has fallen from a high of around $4,000 to about $1,300. Overall, the digital asset market has shed trillions of dollars in market cap due to socio-economic uncertainty resulting from the Russia-Ukraine conflict, unprecedented levels of inflation, and the post-COVID social and economic issues.
In addition to an unstable geo-political environment, the virtual currency market and larger blockchain ecosystem has been hit hard by the collapse of major projects such as Terra (LUNA), Three Arrows Capital, crypto lenders BlockFi, Celsius, and Voyager, as well as the spectacular downfall of digital currency exchange FTX. It has become quite clear that VC firms and investors have not been carrying out the necessary due diligence before pouring in millions of dollars into crypto-related initiatives.
The downfall of FTX can also be compared to other major cases of fraud like Elizabeth Holmes’ Theranos and the giant Ponzi scheme orchestrated by the late Bernie Madoff, which unfolded in spectacular fashion at the time of the 2008 financial crisis. All of these massive cases of fraud have taken place because regulatory authorities like the US Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and other global regulators have not been as effective as they should be at identifying potentially fraudulent activities before they’ve actually happened.
However, regulators aren’t the only ones to blame. Large VC firms and investors, including Tiger Global, and SoftBank, among many others, have just not been vetting projects as well as they should be. This has allowed so-called entrepreneurs like Sam Bankman-Fried, the former CEO and founder of FTX, to obtain large amounts of capital – which has been squandered on risky bets along with getting away with misappropriating customer deposits. Despite all these major scams and fraudulent activities that unfolded during 2022, several positive developments also occurred.
Ethereum Merge – the Most Defining Moment of 2022
Jack Tan, the Co-founder of WOO Network, a system of centralized finance (CeFi) and decentralized finance (DeFi) services designed to enable deeper liquidity for various cryptocurrency market participants, has noted:
“The successful completion of The Merge in September is the most defining moment of 2022. The historic overhaul of the second-largest blockchain network involved the joining of the original execution layer of Ethereum with its proof-of-stake consensus layer. It took two years of testing and more than 100 bi-weekly calls by hundreds of developers globally that resulted in the elimination of the need for energy-intensive mining and an increase in security that paves the way for future scalability upgrades.”
While some may argue that the transition of Ethereum from proof-of-work based consensus to proof-of-stake (PoS) might lead to the ETH being considered an unregulated security (and the blockchain becoming less decentralized), there’s still no denying that this was truly a historical upgrade for Ethereum and a key milestone for the crypto-asset industry as a whole. Never before has a blockchain network as large as Ethereum successfully transitioned from one major consensus protocol to another. However, some market participants have not responded positively to Ethereum’s evolution.
For instance, Paxful, a major P2P Bitcoin marketplace, made the (abrupt) decision to stop supporting Ethereum (ETH) marketplaces on their platform. According to Paxful CEO Ray Youssef, they ended support for Ethereum because it has been used to issue numerous crypto tokens, which have turned out to be massive scams, and this has taken away a lot of positive momentum from Bitcoin. Youssef also pointed out that Paxful’s mission of financial freedom and empowering individuals across the globe will always take priority over short-term profits.
In addition to more platforms and individuals coming forward to support the true value proposition of Bitcoin and the power of decentralization, large Fintech companies like Nubank have also taken a more serious approach toward the adoption of crypto-assets.
In yet another step towards democratizing access to the world of digital currencies in Latin America, Nubank (NYSE: NU) announced two more cryptocurrencies as part of the Nubank Cripto experience, which is currently available to over 67 million customers in Brazil.
Introduced in May of last year, with Bitcoin (BTC) and Ethereum (ETH) as options, the platform now also has support for Polygon (MATIC) and Uniswap (UNI).
Since its launch, Nubank Cripto has reportedly registered around 2 million users who have bought digital assets via the Nubank app at least once.
To make access easier for consumers interested in starting their journey in the crypto space, Nubank developed the experience based on key attributes like simplicity, security and greater accessibility.
Notably, it’s possible to acquire fractions of the available virtual currencies from BRL 1.00 (one real), which are guarded by Paxos, a provider of blockchain infrastructure that “guarantees” the protection of client assets by the main regulators of crypto-assets.
In addition to being able to purchase various cryptocurrencies, the Nubank Crypto section in the Nubank app includes Crypto School, which provides educational content about the world of virtual currencies. The School gives people access to tutorials that explain volatility, crypto use cases, and even explanations of some of the major cryptocurrencies, including the newly available Polygon and Uniswap.
Value Proposition of Decentralized, Uncensorable Monetary Networks Is Still Quite Appealing
It should be clear or evident from these positive developments that the crypto space has grown well beyond just the Bitcoin and Ethereum platforms. Even though the digital currency market shed trillions of dollars in market cap this past year due primarily to the collapse of some of the largest (and now most questionable) projects in the ecosystem, the value-proposition of decentralized, uncensorable monetary networks is still quite appealing. As Coffeezilla explains during a Podcast/interview with Lex Fridman, cryptocurrencies like Bitcoin are useful because they allow people to exchange monetary value in a decentralized manner. You need not ask for permission to use these financial networks, which makes them truly powerful and revolutionary.
Some people might think it’s now too late to gain exposure to the Bitcoin and larger crypto-asset ecosystem. However, Bitcoin adoption is still in its early growth phase as a relatively small percentage of people are actually invested in crypto-assets. This, according to a recent report from digital asset firm Kraken.
The extensive report concluded:
“In summary, while it can often feel like it’s too late to invest, there’s actually never been a better time to invest in the bitcoin market. Overall adoption is still relatively low in comparison to other well-established assets, the technology itself is still developing and the market is only now becoming more mature.”
Looking Ahead: What to Expect in 2023?
As we look ahead to what could take place in 2023, we should expect more regulatory scrutiny and also greater regulatory clarity. Authorities across the globe have been forced to pay close attention to the crypto space due to the large number of hacks and scams that took place last year.
Jonathan Garcia, Partner at Gibraltar law firm ISOLAS, has noted:
“Industry insiders will hope 2023 will be a year of recovery in the digital assets space. In light of 2022, with failures such as FTX, consumers will want accountability. Institutions must provide credible business models – hype will no longer be good enough to influence consumers on what and who they choose to trust.”
Garcia adds:
“It will be important for regulators to build back user trust and it must be sophisticated and robust enough without stifling innovation. Because of recent failures, there is huge pressure on regulation. With this pressure, there is the possibility to over-regulate which brings its own dangers and should be monitored to ensure balance. Global regulators could seek to regulate in the style of Gibraltar, with a ‘right touch, not light touch’ regime.”
Tim Frost, CEO of digital wealth platform Yield App, says:
“As we emerge from one of the worst years for crypto hacks in history, DeFi has reached a turning point. According to Chainalysis, over $3 billion was stolen in 2022, with nearly half of that from DeFi. In fact, the total value locked in DeFi has wilted away from over $166 billion at the beginning of last year to just $39 billion today. This can be largely attributed to the crypto winter, but also to a severe lack of trust in a sector that is beset by hacks.”
According to Tim Frost, DeFi, while still in its infancy, remains “one of the most exciting innovations in cryptocurrency.”
But despite its growth in recent years, smart contract exploits are still really common, Frost acknowledged. As recently observed by a group of crypto auditing firms, developers in DeFi are spending a lot more time coding than they are analyzing exploit reports, Frost noted.
He also pointed out that many DeFi projects don’t go through adequate security testing before they go live.
Frost also mentioned that hackers are becoming a lot better at identifying vulnerabilities and holes in these hastily constructed smart contracts – bridge attacks alone accounted for about 70% of losses in 2022, according to a report from Elliptic.
As weak as they are, though, there are few solutions for those interested in moving assets from one chain to another, Frost reveals.
He continued:
“We have to reach a point in this industry where we balance innovation with safety. And by safety, we don’t mean handing everything over to an opaque entity with savvy marketing. Instead, we must find a middle ground between security and yield-generating opportunities so that DeFi can truly thrive.”
The Industry Has “Room for Improvement”
As noted in a report from Chainalysis, the events of this past year have made clear that although blockchains/distributed ledger tech (DLT) networks are inherently transparent, the industry has “room for improvement.”
According to Chainalysis, there are opportunities “to connect off-chain data on liabilities with on-chain data to provide better visibility, and the transparency of all transactions on-chain in DeFi is a standard that all crypto services should strive to achieve.”
Chainalysis further noted that as more and more value is transferred to the blockchain, all potential risks will “become transparent, and we will have more complete visibility.”
As noted in the report from Chainalysis:
“Despite the market downturn, illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.1 billion. We have to stress that this is a lower bound estimate — our measure of illicit transaction volume is sure to grow over time as we identify new addresses associated with illicit activity, and we have to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (e.g. conventional drug trafficking involving cryptocurrency as a mode of payment). For example, last year we published that we found $14 billion in illicit activity in 2021 — we’ve now raised that figure to $18 billion, mostly due to the discovery of new crypto scams.”
It should now be clear that the crypto space is still maturing and decentralized networks are still in their early stages of development. As the underlying technology continues to improve, we’ll definitely have more sophisticated (probably AI-based) ways of detecting fraudulent activities before they’ve actually caused a lot of damage. It’s also evident from the key developments of 2022 that regulators need to do a lot more when it comes to doing their job effectively. This will undoubtedly involve having more meaningful and productive conversations with crypto industry professionals and major blockchain firms.
With the recent bear market in the crypto industry and the wider macro landscape, one would assume very few firms are actually interested in blockchain. However, a report from CasperLabs indicates otherwise. Based on a survey of more than 600 business decision makers from across the US, UK, and China, the report reveals that large businesses are interested in adopting blockchain/DLT to make their operations considerably more efficient.
Blockchain Adoption Expected to Continue, Despite Setbacks
In a survey of business decision-makers in the UK, China, and the US, the report found:
- 81% expect tech budgets to increase in 2023, even amid an expected downturn.
- 87% are somewhat or very likely to invest in a blockchain solution in the next 12 months. This is especially true in China, where more than half (55%) say they are very likely to make an investment, compared to US (48%) and UK (42%) respondents.
- 54% still see blockchain and crypto as interchangeable terms, even though the former is just a single application of the latter.
- 86% would be more interested in deploying blockchain if there were a hybrid option that allowed the secure migration of data between public and private environments.
According to the report, the most significant blockchain adoption hurdles are: limited developer knowledge (25%), lack of viable tools (24%), interoperability concerns (20%), and anti-blockchain cynicism (18%).
2023 Could Focus More on Utility
In addition to these expected trends and developments, Fintech firm Ripple says that 2023 holds a lot for crypto and blockchain. This year will mainly focus on utility, Ripple claims.
They’ve pointed out in an extensive report that this was the “watchword” of nearly every Ripple executive that weighed in with predictions for 2023. From non-fungible tokens (NFTs) to central bank digital currencies (CBDCs) to sustainability, most of the expectations for crypto-assets and blockchain this coming year involve its application for real-world utility.
Partly in reaction to the “turmoil” of 2022, Ripple SVP of Engineering Devraj Varadhan expects to see a shift in the marketplace from speculative projects to firms that actually harness crypto solutions to address real-world problems and also address unmet customer requirements. He believes these are the firms/businesses that will reap “long-term” success.
As noted in a comprehensive report from Ripple:
“A focus on real-world applications will also help propel the coming age of CBDCs.”
Sendi Young, Managing Director of Europe (at Ripple), says the potential for CBDCs to amplify the role of central banks and boost financial inclusion will “lead more non-eurozone European nations to announce CBDC pilots in 2023.”
James Wallis, VP of Central Bank Engagements, expects to see more CBDC pilot programs around the world in the year ahead, “with an emphasis on interoperable CBDC solutions that enhance cross-border payments.”