Robust regulation key to limiting fallout from repeat of crypto winter

OMFIF’s ‘Digital assets’ report examines the economic opportunities the new asset class presents

The world of digital assets is still reeling from the ‘crypto winter’ — a huge collapse in asset valuations in early 2022 triggered by the failure of a major stablecoin, resulting in the insolvency of some institutions.

The episode shared many of the characteristics of the global financial crisis — hubris around high-yielding, purportedly low-risk strategies, excessive leverage and systemic risk because of institutions’ mutual exposure. Mercifully, it was on a smaller scale and, since the digital assets industry is fairly self-contained, it had far less impact on the broader economy.

But the crypto winter has done little to dampen the dynamism of the sector and, while valuations are still down, innovation and development continue apace. The possibilities for new models of economic activity enabled by a digital asset ecosystem are still as exciting to businesses and creators, even though the speculative froth of a $2.8tn market capitalisation has been blown away.

A digital asset ecosystem, built on decentralised infrastructure, promises a means of monetising digital products independently of traditional intermediary institutions. While in regulated industries many of these intermediaries will have roles that cannot easily be removed by new technology, there is still a compelling opportunity to improve efficiency and add new functions.

OMFIF’s ‘Digital assets’ report examines the economic opportunities digital assets present, looking at different kinds of digital assets and the possibilities they offer for businesses and individuals to deliver value and generate revenue.

One of the most exciting areas where the digital asset ecosystem can incite change is the infrastructure of financial markets. Over the course of researching the report, we have observed a convergence between the architecture of the crypto investing and decentralised finance worlds and that of traditional finance.

As the crypto world learns prudential risk management policy and regulation, traditional finance is using the technology underpinning cryptocurrency to tokenise and fractionalise financial instruments, broadening its investor base, improving liquidity and adding functionality.

A functioning digital asset ecosystem cannot develop overnight. For it to work effectively, there are a variety of technical services that must become commonplace. Some, like cloud services, are already in place. Others, like digital identity, still require a great deal of work before they are fit to underpin a digital asset ecosystem of systemic importance.

The report also examines the developing legal framework for digital assets. As digital assets grow in importance, the consequences of a repeat of the crypto winter grow more severe. Accordingly, regulators are doing their utmost to develop the regulatory architecture required to make the digital assets class into a healthy, safe marketplace. Achieving financial stability, investor protection and preventing financial crime without degrading the efficiencies and privacy features that digital assets can offer is an immense challenge for regulators.

Finally, we are proud to present OMFIF’s digital assets regulatory policy tracker, produced in partnership with Bittrex Global. The tracker provides a breakdown of the most important pieces of digital assets regulation in 23 key jurisdictions around the world. It allows users to see if a jurisdiction has enacted bespoke regulation for cryptoassets or if it is using pre-existing securities regulation. The tracker also lets users see where various jurisdictions stand on issues like cryptocurrency mining, exchanges, derivatives trading and more.

Developments in digital assets are rapid and the possibilities are only just beginning to become clear. We have not seen the last crypto winter, but robust and well-crafted regulation will mitigate any damage. The benefits that a digital asset ecosystem offers will prove worthwhile.

Lewis McLellan is Editor of OMFIF’s Digital Monetary Institute.

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