The implosion of FTX that we are witnessing towards the end of 2022 is another shock in the crypto world and the reaction to it will define 2023.
FTX – a major player with significant backing from huge mainstream investors, high profile sports sponsorships and leaders who were seen as part of the financial establishment has been described as crypto’s Lehman’s moment. It is very sad to think of the people who have lost money and of the implications for those involved as this plays out.
And yet – I have written before in RB’s sister publication, Private Banker International, that the shake outs in the crypto space are ultimately beneficial because they will force the sector to get more professional and serve to bring DeFi and the opportunities it can create for everyone closer to the mainstream. And between the crypto winter and now FTX we have seen two significant catalysts that will hugely accelerate that trend in 2023.
Burnt investors to vote with their feet
Next year, we expect regulators that have been circling the crypto sector to start engaging with purpose and that the good actors in the space will rapidly make moves towards the enhanced transparency that crypto’s tech allows. Because increasingly, we expect crypto investors that have been burnt once too often in the “wild west” to start to vote with their feet and look for a measure of old school reassurance alongside next generation fintech.
What’s more, regulators will demand it. As with many sectors where investors speculate, losses that have been too high have been a fact or life since crypto really became popular in 2011, but this time the damage is many billions at once. It is, of course, a significant event and we anticipate that regulators will not wait to see what another occurrence looks like.
So, expect to see authorities in the US taking a robust approach. Offshore centres like the Bahamas will feel increasing pressure to follow suit and of course in the EU the implications of the new crypto regulation MiCA (Markets in Crypto Assets) will be felt as this becomes real. In many ways we expect 2023 to be the year crypto gets regulation.
Equally, we expect many players to proactively step up and offer state of the art transparency to address the concerns of the market. What “Proof of Reserve” actually means will become a key conversation in crypto. For example, over the last few days we’ve seen partial audits from exchanges exposing their balance sheets without the liabilities.
Clearly, this won’t cut it when investors are fearful – so expect in 2023 to see much energy expended in the crypto sector on creating, and bringing online, services that generate enhanced transparency with proof and robust audit whilst protecting the discretion of currency holders, with a leading example being “Zero Knowledge proofs” technologies which have made great progress recently.
Crypto to get serious in 2023
For those in the private banking sector particularly, we expect this to be an interesting year in crypto. As the trend for regulation and transparency gather’s momentum we expect more and more firms in the space to become emboldened and start to engage with crypto to provide their clients with services. In spite of recent events it remains, after all, a significant area of interest for their clients who are increasingly seeking ways to participate in the potential of a decentralised, low-cost universally accessible finance system. But they will want to do it as safely as possible with the reassurance created by expert advice, rock solid custodian services and via organisations that have a long tradition of governance and robust third-party audit.
Crypto got cautious in late 2022 and will seek to get serious in 2023 – at the events and conferences where the crypto community gathers, expect to see more suits and less surf and skater gear.
Rani Jabban, managing director, Arab Bank (Switzerland)