The crypto hype is giving way to reality

As the glamour of digital assets fades, the real worth of the market is emerging

Last year, the crypto winter wiped around $2.3tn (75%) from the alleged value of digital assets, impoverishing cryptocurrency traders in the process. Many commentators were keen to call time on digital assets and conclude that the craze is over. With the advent of central bank digital currencies in major economies seemingly delayed for the foreseeable future and significant non-financial services’ distributed ledger technology-based applications failing to develop compelling commercial use cases, many digital assets projects have been quietly put on ice or discontinued.

Speculative interest has largely charged off to the next El Dorado: artificial intelligence. Yet amid the rubble and against a challenging economic background characterised by slow growth, inflation and high interest rates, there is an emerging digital asset infrastructure
concentrated on wholesale financial services activities.

On one hand, we have systems and businesses dedicated to the exchange and custodianship of digitalised versions of traditional financial instruments. The primary objectives are the unglamourous pursuits of increasing speed and efficiency, reducing costs and improving security. This field will largely be the domain of wholesale financial institutions and high-net-worth-individuals rather than mass retail customers. Out of the limelight, it will develop and deploy sophisticated financial architectures which will potentially strengthen the stability of global financial activities while simultaneously posing new and complex challenges for regulators and supervisors.

On the other hand, the ecosystem is entering a period of reflection and regrouping. With the meteoric rise over, the focus is shifting onto real, commercially valuable use cases, as opposed to speculative investment.

The debacles of FTX and Terra/Luna resulted in a souring of attitudes to cryptocurrency and put the industry squarely in regulators’ crosshairs. The world’s leading policy-makers and legislators are hashing out the details of exactly how these instruments should be treated. Although we are still a long way from global regulatory consensus, at a national level, the discussions are moving rapidly and bodies like the Financial Action Task Force and International Organization of Securities Commissions are laying the groundwork for an international approach. With that consensus emerging – alongside institutional-grade infrastructure – regulated institutions may begin to engage with cryptoassets more enthusiastically and in larger volumes.

For many wholesale financial activities, including exchanges and custody, strategic emphasis is turning towards developing a synthesis between digital and tokenised assets to avoid having to deploy parallel architectures. Most investment managers will want to be able to interact with crypto and tokenised instruments using the same systems with which they manage their traditional portfolios, so the future is likely to belong to those who can most effectively integrate token and DLT-based systems with existing ones.

This latest OMFIF study of the digital assets market arrives at an interesting juncture in its evolution. The second edition of the report discusses regulatory developments, explores major issues and ventures forecasts and opinions. We would like to thank report sponsors, contributors and research participants for their generous assistance and hope readers will find the analysis stimulating and compelling.

Philip Middleton is Chairman of the Digital Monetary Institute, OMFIF.

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