Transparency, safety, security: some New Year’s resolutions for cryptocurrencies

By Eddie Hui, chief operating officer, MetaComp

Contrary to all-time highs that lifted its valuation to $3 trillion in 2021, cryptocurrencies had a drastically different 2022. to the industry, including celebrity endorsements and million-dollar sports endorsements. While the tide has certainly turned since then, they are still some milestones to celebrate in 2022.

This year, the market has seen global adoption remain above pre-bull market levels, with a special mention for emerging markets across Asia which have dominated the Chainalysis’ Global Cryptocurrency Adoption Index. Meanwhile, the entire industry has been waiting with bated breath for the long-awaited Ethereum “Merge” to take place successfully.

With the end of the year as a time for reflection, those milestones seem a world away. Collectively, the industry must acknowledge its mistakes and missteps in hopes of restoring confidence in the industry in the year ahead. So let’s take a step back and reflect.

The great crash of cryptocurrencies

One tech venture that once again failed to deliver on its promises was algorithmic stablecoins, a “two-coin” system where the stablecoin relies on smart contract-based algorithms to reduce the price volatility of its underlying asset. Let’s go back to the first days of spring, when the stablecoin TerraUSD (UST) lost its peg to the US dollar and its companion token LUNA, designed to stabilize the price of USDT, fell from $80 to a few cents. The result? $60 billion evaporated into thin air, leading to devastating losses among retail investors around the world, including those who had invested their life savings, lured by the promise of earning 20% ​​returns on their UST holdings.

And the contagion has spread, as Singapore-domiciled cryptocurrency hedge fund Three Arrows Capital suffered heavy losses to the tune of $3 billion and found itself unable to repay lenders and other counterparties. Bankruptcy filings followed throughout the industry. Now, one of the platforms that has lent a helping hand to struggling industry players is facing an even worse fate. This November, digital asset exchange FTX crashed in 10 days after misusing client funds, resulting in a solvency crisis and the industry’s “Lehman moment.”

Much like the 2008 global financial crisis that impacted the genesis of bitcoin, regulators are now paying more attention. Cryptocurrency company lawyers and counsel agree that the FTX debacle serves as a wake-up call for the industry, which is now too big for a “wait and see” approach to enforcement. A stronger regulatory regime is the only way to rebuild confidence while ensuring consumer protection.

Not so new kids on the block

However, all is not lost in the chaos. Despite the bear market and ongoing crypto winter, institutional interest in digital assets remains strong. Fidelity Digital Assets’ Study on digital assets for institutional investors found that 75 percent of its respondents plan to invest in the future. These results come on the heels of major TradFi players such as BNY Mellon and Goldman Sachs doubling down on the sector. Booms and busts aside, institutional players are now recognizing the value and legitimacy of the asset class, but is this what the cryptocurrency market needs?

Historically, cryptocurrency has been praised as a sufficiently uncorrelated asset, allowing investors to diversify their holdings to better mitigate the effects of global macroeconomic events. In recent years, cryptocurrencies have started to exhibit a stronger correlation with traditional equities due to growing demand and participation from institutional investors with high exposure to traditional markets, especially in Asia, and this has further intensified this year. ‘year. While this certainly indicates a sign of market maturity – after all, the more players the better – some have argued that this has hurt the very proposition that cryptocurrency sought to offer, such as an entirely new financial system removed from what we have lived for. centuries. Still, there’s no denying: the influx of such capital is undeniably what the industry has needed for a long time, propelling it to new heights and funding the new innovations we see today.

Years later, mindsets need to evolve: both TradFi and crypto (be it DeFi or CeFi) need to learn a thing or two from each other. Indeed, Christy Goldsmith Romero, commissioner at the Commodity Futures Trading Commission, expressed that the guidelines governing TradFi can serve as a point of reference for crypto. In perhaps one of the most progressive moves of the year, the Monetary Authority of Singapore has engaged domestic banking players as part of Project Guardian to launch a series of pilot projects focused on identifying potential uses for DeFi innovations in today’s financial system . Last November, several banks piloted a live exchange of tokenized Singapore government bonds, Singapore dollars, Japanese government bonds and Japanese yen through authorized DeFi liquidity pools on Uniswap. It is evident that the learning is twofold: both TradFi and cryptocurrencies have to learn a lot from each other.

Looking ahead, it is clear that a commitment to safety, security and compliance is no longer a luxury, but a necessity for the industry to ensure its long-term growth. These are just some of the core principles that cryptocurrencies should further inculcate among projects to shed their Digital Wild West reputation.

Restore and rebuild trust

Rome wasn’t built in a day, and neither was the cryptocurrency industry. As regulators struggle to keep pace with the staggering rate of innovation, gaps remain and industry players will need to take responsibility for striking a collaborative tone. In many ways, what the cryptocurrency industry is experiencing now is similar to what the capital markets have experienced and are still experiencing since its inception in the 17th century.

In Asia, Singapore continues to pioneer its sandbox approach through vetted pilot projects backed by its financial regulator to explore the benefits of blockchain and digital assets. Meanwhile, Hong Kong has been trying to regain its status as a financial hub by proposing to legalize retail investor participation in cryptocurrency trading and trading in cryptocurrency exchange-traded funds. Elsewhere, the European Union plans to vote on its Cryptocurrency Markets Regulation (MiCA) next February to standardize policing and improve customer protection frameworks for all crypto-asset service providers within the bloc. In the US, scrutiny against exchange operators is growing following the collapse of FTX, with major firms like Binance and Coinbase now being questioned by regulators like Ron Wyden, chairman of the Senate Finance Committee, to explain their corporate structures and customer protection policies.

As we collectively look to 2022, we’d do well to remember the birth of the industry: we have a lot to learn and a long way to go. AAs an industry, we cannot afford to make the same mistakes as Big Tech and TradFi which, in some cases, have thrived on opaque systems at the expense of their users and customers. Armed with the ability of blockchain to provide an immutable and public ledger, 2023 must be the year we do better: transparent governance and correct behavior of its customers must be the norm.

About the author

Eddie Hui is the chief operating officer of MetaComp. Based in Singapore, Eddie has over 20 years experience in the financial sector, having worked for Société Générale for the majority of his career. In 2008 Eddie began working in front office functions, subsequently holding COO roles for the Proprietary Trading business; COO for Fixed Income Credit and FX; COO for core services; and most recently COO for the Equity Market Making desk, operating in Hong Kong. Eddie’s experience in traditional finance and his passion for cryptocurrencies allow him to bridge the gap between these two environments as he engages with institutional clients on behalf of MVGX. Eddie graduated in 1999 from ENSEEIHT (Ecole Nationale Supérieure d’Electrotechnique, Electronique, Informatique, Hydraulique de Toulouse) with a Master of Science in Engineering. Eddie is also the COO of MVGX, a digital green exchange licensed and regulated by the Monetary Authority of Singapore.

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