"Crypto winter" and renewed confidence in Davos

A busy "crypto winter"

- 1,800 billion. This is the amount that separates the start of the "crypto winter" in November 2021, when the market capitalisation was close to USD 3 billion, with today's prices¹. Numerous incidents in 2022 revealed the many flaws of the crypto world. One key event was the crash of the Terra Luna algorithmic stablecoin, and its subsequent snowball effect. Our takeaway is that the risk assessment of these underlyings, and their ecosystem, is vital to the success of projects. Comprehension and education are essential. 

The most striking shock was the collapse of FTX, which had some of the heaviest consequences in financial history. The hack damaged an entire ecosystem, including retail and institutional investors alike. As a result, Genesis, a cryptocurrency lending desk, recently filed for bankruptcy, while some tech firms have been required to lay off part of their workforce. 

The crypto industry should soon learn the lessons of these events in order to safely exploit the potential of cryptocurrencies, as recent price gains seem to predict better times ahead. 

For their part, banks remain highly cautious of cryptocurrencies. 

Major achievements

Although the headline-hitting crypto and blockchain sector is highly sensitive to negative news, the industry has posted numerous successes in the last two years. We can certainly see the glass as half full!

Bitcoin enjoyed a problem-free year in 2022, without a hard fork and, most importantly, with excellent availability and autonomy. The crypto community has mobilised to support and assist Ukraine and transaction volumes remain high.

The change in protocol of the second Ethereum cryptocurrency, from proof of work to proof of stake, is also a major step forward in the field. The revamp, known as "The Merge", reduces Ethereum’s energy consumption by 99.8%. This cryptocurrency is used to create smart contracts, which has enabled the development of numerous use cases in all sectors as well as non-fungible tokens. This achievement will undoubtedly contribute to institutionalising the market. 

The institutionalisation of markets, both in terms of the use of cryptos and technology, is also an important milestone for the industry. This is particularly true in the United States where, for example, asset manager Black Rock² now provides its clients with access to crypto trading through its Aladdin tool and connectivity to Coinbase Prime. With this landmark announcement, an entire ecosystem will gain a foothold in this new asset class. In another register, Europe has invested in security token issues and transfers. In 2021, Societe Generale FORGE, a subsidiary of the Societe Generale group, tokenised the EIB's first bond issue in a public blockchain. Traditional stock exchanges such as the Luxembourg Stock Exchange have admitted these digital securities to official listing.

Encouraging outlook 

At the Zurich and Davos summits, policy makers stressed the need to regulate the industry. François Villeroy de Galhau³, Governor of Banque de France, insisted on the need to regulate in a coordinated manner. Policy makers were unanimous in their understanding of the value of blockchain and its ability to improve efficiency and ensure transparency. The Market in Crypto Assets (MiCA) Regulation and the pilot regime for the tokenisation of assets will provide more clarity to stakeholders while strengthening investor protection. The death of cryptos is no longer foreseeable, but their survival will hinge on regulation.

At the same time, most central bankers praised Central Bank Digital Currencies (CBDCs), with the aim of reducing infrastructure costs and moving towards a cashless society, as well as improving financial inclusion. Despite the strong development of the Digital Yuan in China, the main Western countries are not ready and willing as yet but are looking into the subject. It should be noted that 80%⁴ of central banks have an ongoing project in this area. At the same time, some countries, including El Salvador, have taken another direction by adopting Bitcoin as legal tender. 

After an eventful 2022 for crypto, the coordinated development of regulation is therefore a partial response to the year's incidents. Institutional investors are increasingly intrigued by the subject. The sector is constantly evolving and innovation is key, notably with NFTs, the metaverse and decentralised finance. All technologies must go through cycles before they are ready for adoption. Some are more mature and approaching the productivity plateau, while others are still in the "hype" phase. All of this gives us plenty to look forward to this spring.

*https://www.wipo.int/pressroom/fr/articles/2022/article_0011.html
¹CoinMarketCap.com
²https://news.fintechnexus.com/blackrocks-aladdin-clients-have-direct-access-to-crypto-markets-through-coinbase-prime/
³https://www.bloomberg.com/news/articles/2023-01-18/bankers-and-regulators-find-common-ground-on-crypto-at-davos
⁴https://coins.fr/cbdc-serieux-80-banques-centrales-bce/