Reeling from high-profile failures in 2022, those seeking to promote blockchain as a major solution for financial industries need to demonstrate some success if they are to regain their momentum.
The crypto industry suffered some savage blows in 2022. A virulent combination of incompetence and malignity brought down first the Terra/Luna stablecoin ecosystem and then FTX, until recently the second largest cryptocurrency exchange in the world. The consequences for the cryptocurrency market cap have been devastating.
Optimists say that these events will serve to blow away the speculative froth, shake out the bad actors and let the rest of the industry get on with building some truly valuable applications for blockchain under the renewed scrutiny of regulators.
Perhaps they’re right, but even those outside of the crypto speculation game that are seeking to make blockchain work for the finance world will have a great deal of work to do in 2023 to overcome the fiascos that occurred towards the end of last year.
While the crypto collapse grabbed the headlines, Sopnendu Mohanty, chief fintech officer at the Monetary Authority of Singapore, said that the Australian Securities Exchange’s decision to abandon its blockchain securities exchange project after six years and A$245m-A$255m ($164m-$171m) invested would have a bigger impact on the adoption of blockchain.
Speaking at the OMFIF Asia Forum in December, Mohanty called the development ‘a fiasco’, saying ASX’s blockchain project ‘was supposed to be the leading light showing how distributed ledger technology can change everything and make the processes super efficient, and that collapsed.’
Shortly after the failure of ASX’s blockchain replacement project, TradeLens, a blockchain-powered supply chain ecosystem, announced that it would also be discontinuing operations early in 2023. The project was a joint venture from AP Moller Maersk and IBM and its demise signals the end of one of the more promising avenues of enterprise blockchain deployment.
These two events have seriously dented hopes that the promises made about blockchain’s ability to revolutionise processes in financial markets will be realised. That, combined with the collapse of cryptocurrency value, has robbed the industry of much of what momentum was left after central banks around the world began to tighten monetary conditions and the tide of cheap credit began to ebb.
But, despite the loss of momentum, Mohanty is far from ready to throw in the towel on blockchain. He affirmed that Singapore remains invested in DLT as a technology that can add value by changing business processes.
That may take a more radical approach to governance. Mohanty suggested that some of the problems that emerged in 2022, particularly in the case of FTX, stem at least in part from an excessive centralisation of control. Mohanty pointed out that this was possible because of the creation of private, permissioned blockchains designed to fit in with existing players’ preferences. He suggested returning to the original public blockchain model.
The cryptocurrency industry must also make changes. Speaking on the same panel, Rana Kortam, director of global public policy at Binance, said: ‘It’s on us at Binance and every player to hold ourselves to a higher standard. The companies that differentiate themselves will be those that adopt proper risk management measures.’
The panellists also agreed that DLT has a great deal to offer in terms of modernising cross-border payments. That could involve the use of effectively collateralised stablecoins, as suggested by Binance’s Kortam, or deposit coins issued by banks as suggested by fellow panellist Naveen Mallela, managing director of JP Morgan’s Onyx Coin Systems project.
Andrew McCormack, centre head for the Bank for International Settlements’ Innovation Hub in Singapore, warned that, though blockchain-based solutions like these may seem attractive, the proliferation of these kinds of systems may well lead to fragmented liquidity unless there is an effective solution for interoperability.
Lewis McLellan is Editor of the Digital Monetary Institute, OMFIF.