The cryptocurrency crash, which saw the market fall from a peak cap upwards of $2.9trn in November 2021 to a low of under $800bn a year later, served to exacerbate already significant public scepticism of the industry.
It remains to be seen how long it will take the market value to recover to that high, hovering around the $1bn mark as it is and has been since June 2022, and the fallout continues. For example, BlockFi, the cryptocurrency lender that filed for bankruptcy in the wake of the collapse of FTX last year, is currently seeking to block efforts from what was the second biggest crypto exchange (and another creditor, Three Arrow Capital) to retrieve billions of dollars from it.
Despite such setbacks, stemming from the dramatic downsizing of the market, the maturation of the industry continues elsewhere. Regulation is becoming an increasingly looming presence around the world and various governments are exploring crypto launches themselves.
James Harris, Commercial Director at crypto data and index solutions provider CCData, discussed these issues and more with GlobalData ahead of guesting on the company’s Cryptocurrencies: the world's most polarising technology webinar on 21 September, for which registration is open now.
GlobalData: To what extent are cryptocurrencies maturing and moving towards mainstream acceptance? And how has this been affected by 2022’s ‘crypto winter’?
James Harris: Cryptocurrencies are undeniably maturing and gaining traction in mainstream financial circles, but the journey to full acceptance remains a work in progress. 2022 was a testament to the challenges faced by the industry, particularly with the institutional narrative. Several significant setbacks, such as the unexpected collapse of the FTX exchange, raised concerns and dented trust. 2023 has shown signs of recovery and renewed interest.
The continuous influx of institutional investments and Bitcoin's strengthening narrative as both a hedge against currency debasement and a digitally native payment network are positive indicators. Noteworthy recent developments, like Blackrock's move to secure approval for an exchange-traded fund and PayPal's announcement of launching a stablecoin, underscore the growing confidence in the sector's potential.
Yet, it's essential to approach the crypto landscape with caution. The industry still grapples with a darker side, characterized by scams and other unethical activities. As the sector matures, navigating these challenges will be crucial to achieving mainstream acceptance.
How is the regulatory landscape around cryptocurrency developing?
The regulatory landscape for cryptocurrencies is in a state of flux, with authorities worldwide striving to understand and effectively govern this emerging asset class. The response has been varied across jurisdictions. For instance, the European Union has taken proactive steps by unveiling the Markets in Crypto-Assets Regulation, set to be implemented in the coming year. This framework is comprehensive and mirrors other forward-thinking regulations, such as those in the UAE.
Conversely, the US presents a more fragmented picture. Regulatory bodies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission are at odds, attempting to fit cryptocurrencies into traditional regulatory baskets. The ambiguity surrounding whether crypto assets should be classified as securities has led to a series of enforcement actions by the SEC.
Critics argue that this approach feels more like "regulation by enforcement" rather than clear, proactive guidelines. Moreover, ongoing high-profile court cases involving industry giants like Grayscale, Coinbase and Ripple are poised to shape the regulatory narrative. A favourable outcome, as we saw in Ripple's case, could set further positive precedents for the industry.
What opportunities and pitfalls are there for governments developing cryptocurrencies?
Governments around the world are recognizing the potential of cryptocurrencies. Enhanced monetary control is a significant advantage, as cryptocurrencies allow governments to have a tighter grip on the money supply, enabling them to manage issuance, interest rates and the overall supply more effectively.
Additionally, the cost-efficiency of cryptocurrency transactions, which are typically lower than traditional banking methods, is appealing. The transparent nature of blockchains ensures that transactions are both transparent and traceable, and the potential for greater financial inclusion is evident, as cryptocurrencies can bypass traditional banking barriers like minimum balances, reaching a broader segment of the population.
The journey towards adopting cryptocurrencies is not without its pitfalls. Security remains a primary concern, given the susceptibility of cryptocurrencies to cyberattacks. There's also the risk of potential financial disruption, as a government-backed cryptocurrency might challenge and destabilize existing currencies. Furthermore, governments might face resistance from citizens wary of a state-controlled cryptocurrency and the perceived overreach into their financial privacy. Technical challenges, such as developing a secure, scalable, and user-friendly system, add another layer of complexity.
In what direction do you envisage the cryptocurrency industry moving in the future?
My opinion is that the cryptocurrency industry will fork into two segments. The first will be a highly regulated know-your-customer and anti-money-laundering space with compliant exchanges and financial institutions offering services that people would expect on the traditional asset side. Indeed, traditional assets will likely migrate to crypto rails (the jury is out as to whether these will be on private or public blockchains) or at least take on some of the innovative features from the digital asset world.
But there will also be space for a fully enclosed, decentralised finance system that will allow people to borrow, lend and invest money without the need for a central authority. There is a lot to do to get either of these outcomes, but it will surely be an interesting ride!
GlobalData's Cryptocurrencies: the world's most polarising technology webinar on 21 September will explore regulation, the volatility of the industry and cutting through the industry’s noise.