The valuations for digital money topped $3 trillion last year. Bitcoin, the world’s most renowned – or infamous – cryptocurrency, gained nearly 70% in 2021, closing the year at around $50,000 per coin. Subsequently, the rally fueled a slew of celebrity endorsements, even as prices began to wobble in December.
But the selling pressure intensified as the calendar year turned. Since, markets have returned nearly two-thirds of its market value to around $1 trillion, with Hollywood’s stars falling quiet, a tacit reflection of waning optimism.
Yet, regardless of where crypto prices are trading, policy tailwinds continue to provide forward momentum. Back in March, the Biden administration signed an executive order to ensure the responsible development of the digital asset class. In June, the SEC commission reaffirmed Bitcoin’s status as a commodity, building precedence for the type of oversight investors can expect.
Opportunities for architecture
Calls to strengthen the global regulatory framework follow the recent collapse of high-profile crypto funds Celsius and Three Arrow Capital, in July. Both funds invested into lesser-known digital currencies and stable coins, and when those investments soured, the industry voices warning of systemic risk concerns grew louder.
Global confidence for crypto took an overall hit, explained Lars Seier Christensen, chairman of the Concordium Foundation and founder of Saxo Bank, speaking to FinanceAsia. “It is terrible for the industry, but it results from a technological level far below what corporations are used to. I don't believe you can rebuild credibility for poorly designed blockchains, because they will just keep failing,” he said.
While regulation is sometimes synonymous with restriction that can hinder technological developments, the downfall of stable coins such as TerraUSD in tandem with trading freezes on crypto platforms like Binance, warrants strengthened risk management.
Indeed, blockchain technology has the potential to permeate both the personal and professional ecosystems, which is a function of utility, Saro McKenna, Co-Founder and CEO, Alien Worlds, told FA. “An application that delivers true utility and better justifies the user’s time will facilitate rapid mass adoption,” she said, adding that the introduction of NFTs (non-fungible tokens) heralds “true digital ownership”.
Evidence of this utility is beginning to appear in traditional corporate settings, as asset managers look to incorporate digital ledgers to improve middle and back-office functions. JP Morgan already uses blockchain for collateral settlements, building off the technology to streamline fund transfers between banks. At the end of May, the bank announced its involvement in Project Guardian, an endeavour led by the Monetary Authority of Singapore (MAS) to investigate the potential value offered by blockchain and asset tokenisation for use in the wider financial industry. This comes after the CEO had earlier deemed Bitcoin worthless.
The jury remains out regarding whether blockchain technology can entirely replace a bank’s existing infrastructure, particularly given the complexity of back-office capabilities. In addition to investment-related compliance costs and market specific settlement dates, custodian rules may prevent funds from holding digital tokens. In the context of the banking universe, a single mistake can erode trust and credibility, which for blockchain, is arguably already quite thin.
Yet, experts agree that expanding data transparency supports the disruption necessary to facilitate new ideas. Much will mirror the beginning of the internet, according to Lone Fønss Schrøder, CEO of Concordium and vice chairman of Volvo Cars, who highlighted to FA that the metaverse platform will enable forms of new dialogue with customers and colleagues alike.
Such collaboration becomes more important, as companies, investors, and regulators continue to struggle to establish a universal ESG (Environment, Social and Governance) framework. Schrøder suggests that a digital ledger would enable all market participants to follow, calculate, and trade CO2 emissions suitable to their specific industries, while a digital twin in the form of a NFT could help verify documents in an immutable manner and support various sensor footprints to authenticate desired data.
With crypto currencies down for the year, naysayers are having their moment and indeed, such volatility was expected. “We have seen absurd yield expectations and total uncritical trust in pieces of undocumented coding,” said Schrøder.
However, along with these digital resources, other traditional assets are now under pressure. Global inflation is running hotter than predicted and central banks are looking to raise borrowing costs to soak up excessive liquidity and temper consumer prices. This places downward pressure on asset valuations as investors rush to hold traditional fiat money in bank deposits, an anathema to the idea of decentralised finance.
“The crypto market will mature, and the sold, proven technology will prevail” said Schrøder, offering some optimism and noting that with any new product comes initial hype. “We have seen this in the semiconductor markets decades ago, then biotech, fintech and now crypto and blockchain.”
Cryptocurrencies, including stable coins, are here to stay, but they will be regulated by a systemic framework that reflects their growing proportion of fiat monetary systems, Schrøder added.
