After a rather disastrous 2022 for the cryptosphere, 2023 will be a year of regulatory tightening, even beneficial. The mere presence of institutional investors in the cryptoasset universe is not enough to give credibility and legitimacy to these instruments, which lend themselves easily to speculation.
The year that has just ended is something to forget for cryptoasset followers. Passing the USD 3 trillion mark in November 2021, their market capitalization ended 2021 slightly above USD 2 trillion to stay there until March 2022 and then accelerate its fall until the end of 2022 below USD 800 billion. That’s about 60% erosion in a year, about 75% from the summit. In the cryptocurrency segment, still dominant in this universe, the CoinDesk index of the two leading virtual currencies bitcoin and Ethereum, which claim 42% and 20% of the capitalization respectively, has slipped by 64% and 68% respectively in a year . The average drop exceeds 85% for the token index
But beyond these crashes was the crash of the FTX exchange and the domino effect caused by what quickly appeared to be a vast, highly leveraged nebula with multiple ramifications. The reversal of the Caisse de dépôt’s almost C$200 million investment in the Celsius platform failure and the reversal of C$2.5 billion by renowned managers such as Ontario Teachers and BlackRock in FTX remind us that even the presence of large institutions to investors it is not enough to endorse, even morally, this speculative aspect of digital finance.
Only regulation and regulation that provides more hermetic oversight and distancing between investor wealth and the operation of intermediaries will provide this much-needed credibility. FAIR Canada noted in its year-end report that Canadian securities regulators have been very active in this regard. In taking steps to ensure that cryptocurrency exchange platforms operating in Canada register under securities laws, the organization that has made investor rights defense its mission cites the Finance post for whom this intervention limited FTX’s access to the Canadian market, “which allowed Canadian investors to escape the worst consequences of FTX’s collapse”.
But we are only talking about digital exchanges and trading platforms. As regards traded assets, at most work is being done to limit or even curb transmission to traditional financial channels and the banking sector. Also on Tuesday, the U.S. Federal Reserve, along with two banking institution regulators, again alerted the banking industry to risks associated with cryptocurrency activity “most likely incompatible with safe and sound banking practices.”
In September, the White House went a step further by ordering various US government agencies to “step up their responses and accelerate the strengthening of laws aimed at regulating the digital asset sector and identifying gaps in cryptocurrency regulation.” Under the guarantee of the “responsible development of digital assets”, the possible application of preventive measures is targeted through the adoption of guidelines and rules relating to the risks associated with this ecosystem, including its use for money laundering or fraud.
Lack of traceability of asset holders, opacity of governance, open door to illicit transactions, extreme price volatility, subjective underlying value even for stable cryptocurrencies, lack of liquidity, limited monitoring of cryptocurrency platforms and issuers, lack of verification and requirement capital… The list of considerations is long and is in any case part of a wider universe known as digital and decentralized finance which, in itself, is essential and is part of the long term.
… to the government
In this movement, the CFA Institute released a research paper on Wednesday that goes further. The recommendations call for harmonized regulation, which would involve first classifying cryptocurrencies as digital securities or commodities, then regulating related services aimed at protecting investors and participants. There is also talk of technologically neutral regulation of digital finance, with particular attention to the degree of concentration of players and intermediaries, the safeguarding of assets and the custody of values.
One chapter deals with defining the appropriate framework for decentralized finance actors engaged in lending and borrowing activities. Another to stablecoins, which may have similar properties, in some respects, to money market instruments and therefore pose systemic risk, with an emphasis placed on the value of “ peg ”, i.e. the link that serves as an anchor, and on the independent verification of the underlying or the guarantees.
We are here!