Despite a mixed year in the crypto markets, many market participants are not concerned about the long-term health of the sector, saying that legal frameworks in 2023 could restore confidence in the industry.
“Crypto will bounce back,” said Katherine Dowling, a member of the general counsel at Bitwise Asset Management. "This is not the death of cryptocurrencies."
Given the belief by many that cryptocurrencies are here to stay, it is worth looking to the future. Crypto denizens certainly do: after the FTX crash, questions circulated about the future of cryptocurrencies and what regulators would do next.
"There is no rush for regulators to reduce their level of enforcement activity and recent events are likely to encourage them."
Joe Castelluccio of Mayer Brown
But the disappointment at what the FTX implosion represents is very hard to hide, said Yesha Yadav, a law professor and director of diversity, equity and community at Vanderbilt University. “The level of disappointment and disappointment and the feeling of feeling cheated by FTX runs so deep because it was considered one of the most compliance-friendly institutions in the crypto economy and one that would lead regulatory efforts.”
Now, obviously, FTX is the "example of everything that could go wrong," Yadav said. His downfall has sent regulators back to the drawing boards. “They may have to do something different, more far-reaching and more stringent in response to what happened.”
But what can we expect from regulators in 2023?
Regulators will finalize some of the proposals they put forward, said Alma Angotti, partner and global lead for legislative and regulatory risk at Guidehouse. “I think he is realizing that the industry is too big to continue in a 'wait and see' state.”
Whenever there is a major failure or a situation where investors or customers are harmed, regulators and prosecutors scrutinize industry participants even more, Angotti added.
“It is safe to say that US regulators will continue to apply enforcement measures across a range of crypto-asset-related activities,” said Joe Castelluccio, partner and co-head of the fintech and digital assets, blockchain and cryptocurrency groups at Mayer Brown. "There is no rush for regulators to reduce their level of enforcement activity and recent events are likely to encourage them."
We will see more dialogue in the first quarter, Dowling said. “It will be important to pick the first horse out of the gates and get some clear rules of the road. We will see more and faster action on stablecoins and more dialogue and movement because of FTX.”
Hopefully, the FTX debacle can serve as a case study that will help drive the need for clarity and rule-making around custody, client accounts, and liquidity in crypto markets, Dowling said. “The industry needs to rebuild trust in the security of customer accounts. […] That is where regulation can really help.”
Castelluccio said he expects greater enforcement of the rules in retail businesses. “We are likely to see this type of enforcement intensify anyway, as crypto asset prices started to fall earlier this year.”
Yadav agreed and believes that legal frameworks for the crypto industry could arrive as early as next year. "There's no reason agencies can't do it within a year."
But now it's even more likely given the extent of the damage caused by the bankruptcies of FTX, Celsius and Voyager, Castelluccio noted.
“In a sense, the bankruptcies of several major crypto asset players in the last year will likely create additional skepticism about 'cryptocurrencies' in the broader sense,” Castelluccio said. "But I think 'cryptocurrency' is seen by many as a homogeneous and poorly understood industry in general."
There is a need for education and dialogue, and now regulators have to come up with something that crypto market participants can work with, Dowling said. “Whether it's sandboxes or safe play zones, we need to make that leap into a rebuilding of trust. With Proof of Reserves, transparency and transparency will come in handy. That will be the focus in the first and second quarters of 2023. That was not the focus in 2022, but we are seeing increased importance in rebuilding that trust.”
That being said, there are many blockchain applications and digital asset-related businesses that have nothing to do with the activities of these bankrupt businesses, Castelluccio said. “In five years, we will look back and see that the digital asset market leaders in 2028 are companies planting seeds in those areas today.”
