What a difference a year makes. Towards the end of 2021, the crypto market was at an all-time high, reaching a market cap of $3 trillion. These soaring heights have been met in 2022 with painful lows because the crypto market has sunk to less than a third of its value from the previous year.
Crypto enthusiasts will point to a struggling global economy; crypto skeptics will say that the bubble has finally burst. It is true that the crypto market in 2022 has witnessed some seismic events – the implosion of the Terra stablecoin ecosystem and the bankruptcies of Three Arrows Capital, Celsius Network, Voyager Digital and BlockFi to name a few.
However, it will almost certainly be FTX that unwittingly emblazons the year. And, indeed, Sam Bankman-Fried’s turn from crypto White Knight, regulatory friend and supposedly “charitable billionaire” to the broke and incarcerated alleged perpetrator of “one of the biggest financial frauds in American history” in a matter of weeks is certainly noteworthy.
So what for 2023? The crypto market is continuing to feel the aftershocks. Although the contagion hasn’t spread into mainstream financial markets, policymakers fear that it could. We therefore look set to witness a 2023 marked by regulatory intervention.
In the U.S., we will likely see a continued and strengthened differentiation between different categories of digital assets. The Biden Administration's executive order (EO) on “cryptoassets” published in March made it clear that crypto is “here to stay,” with many federal agencies publishing subsequent detailed responses. The concept of a “digital dollar” received support in these reports, though there was substantial skepticism with respect to broader blockchain-based assets. However, these responses didn’t cover the detailed policy interventions that some had feared, such as banning certain crypto assets or requiring crypto providers to be banks.
Although a relief for many in the crypto industry, the executive order still left the door open for more detailed policy proposals to be brought up through legislation. Most notably, the Digital Commodities Consumer Protection Act (DCCPA), the bill championed by none other than Sam Bankman-Fried, remains in progress.
While the DCCPA has run into some recent opposition for granting the Commodity Futures Trading Commission (CFTC) broad oversight over the spot crypto markets (instead of the U.S. Securities and Exchange Commission), it will still be a key baseline for debate in the new Congress. The bill is currently backed by Senate Agriculture Committee Chairwoman Sen. Debbie Stabenow (D-Mich.) and ranking member Sen. John Boozman (R-Ark.).
Moreover, it is noteworthy that long-time crypto skeptic and chair of the Senate Banking Committee, Sen. Sherrod Brown (D-Ohio) recently sent U.S. Treasury Secretary Janet Yellen a letter expressing, for the first time, his willingness to work on crypto legislation. We could finally see bipartisan agreement in 2023 on key issues surrounding stablecoins and broader digital asset oversight and potential regulatory clarity on the allowable limits of banks seeking to engage with crypto.
Across the pond
In the U.K., although mired with its own political problems during 2022, the ambition set in April to be a crypto hub seems to be holding. Current U.K. Economic Secretary Andrew Griffith reiterated the country's commitment to becoming a key center for the nascent industry, saying the collapse of FTX isn't a reason to change course.
With the Financial Services and Markets Bill (FSMB) making its way through Parliament, the Financial Conduct Authority (FCA) is poised to take on broad new powers to regulate crypto markets.
However, firms hoping for a forward leaning approach from the regulator will likely be disheartened by incoming FCA Chair Ashley Alder’s comments at a recent Treasury Select Committee hearing in which he described crypto exchanges as facilitating money laundering and creating “massively untoward risk.” It would appear that the regulator might have its own ideas on how to exercise any new powers it receives once the FSMB is passed into law.
In Europe, hopes continue to be pinned on MiCA, or the Markets in Crypto-Assets bill, a comprehensive piece of legislation that would apply to the 27-member nation trading bloc. Initial plans for the European Parliament to vote on the bill in December were abandoned given its length and complexity, with reports suggesting the vote, initially scheduled for February, have been delayed until April due to translation issues.
MiCA may face pressure to be “FTX-proof,” potentially resulting in even further delays – but the European Commission has been bullish on this front, claiming that under MiCA as currently drafted the failings of FTX wouldn’t have been allowed to happen. Even if true, this legislation is still a long way from being enforceable. Even if the final vote is held and passed this spring, there is still an implementation window of 12-18 months.
There are certainly lots of global regulatory irons in the fire, and a new found impetus to wield them for the protection of markets and consumers. Whether these irons will be forged quickly and thoughtfully only time will tell.