2023 seems to have gotten off to a pretty good start for the digital assets space.
Instability at several crypto projects seems to have at least temporarily resolved itself, and it’s been a few weeks since the last disastrous headlines.
Asset prices are up, crypto miners are reportedly ready to reboot their rigs and retail speculators are once again hungrily eyeing the markets.
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Regulatory frameworks lie ahead
Despite recent crypto market buoyancy and enthusiasm, we should not so quickly forget about the challenges of 2022.
For one thing, many of the structural difficulties for the crypto markets remain in place, according to ZK Zheng, CEO of ZX Squared, a crypto hedge fund.
“2023 continues to be challenging for investors especially during the first half of the year when the [Federal Reserve] is still hawkish, raising interest rates to control the inflation,” Zheng said. “The current crypto bear market cycle may end when the Fed stops raising interest rates (hopefully by the second half of the year), and any remaining leverage in the crypto market is eliminated. This includes debt borrowing related to certain major market participants (investment firms, distressed assets, mining companies, etc.).”
Several of the notable developments last year will help set the course for this year – not only the failures of FTX and Three Arrows Capital, but also the ongoing work to create a regulatory framework for digital assets in the financial industry undertaken by government agencies.
With some of the more spectacular crashes in the digital assets space in 2022, combined with the growing links between cryptocurrencies and the traditional financial system, 2023 is a year in which regulators will need to play a more central role, according to Zheng.
“A crypto regulatory framework needs to be further established and clarified for a new crypto bull market to come,” Zheng said. “It is absolutely imperative to have regulatory audits and transparencies to ensure that stablecoins are fully collateralized and centralized exchanges (CEX) are well capitalized to avoid the repeats of the [Terra] and FTX failures. This may also include a measure on how to handle the counterparty credit risks which were at the heart of the domino effects during this crypto winter.”
Regulatory emphasis at Davos
Nigel Green, the CEO of one of the world’s largest wealth management firms, deVere Group, struck a similar tone.
This week, at the World Economic Forum in Davos, Switzerland, he urged world leaders and influencers to address the issue of cryptocurrency regulations.
“The time for endless platitudes on greater regulatory scrutiny is over. Action is required,” he said in a statement. “Should those in attendance at the WEF not advance the agenda of crypto regulation as a result of the 2023 summit, they will have spectacularly failed.”
Green offered three reasons the globe’s leaders need to get serious about crypto regulation:
- Crypto’s growing role in the financial system
- The need for greater scrutiny to protect investors in the wake of collapses like Three Arrows Capital and FTX
- The importance of boosting economies in emerging countries
Any regulatory framework must balance protecting investors and the financial system with the decentralized nature of digital assets and the need for freedom to innovate, according to Green.
Green also recently commented on the recovery in digital asset prices, noting that the recent crypto winter appears to be thawing.
“Of course, the crypto market will not go in a straight line – no market ever does – but we expect the bears to go into hibernation and bulls are ready to run,” he said in comments made over the weekend.
Zheng said regulatory clarity is necessary for a long-term return to investor optimism.
“Crypto market cycles come and go,” Zheng said. “This time is no different than the previous three extreme bear market cycles during Bitcoin's 14-year short history. The crypto market is driven by fear and greed, just like any other financial markets. Bitcoin's long-term thesis is still intact. Crypto investor confidence will return especially when the market becomes more appropriately regulated for institutional investors.”