After a rather disastrous 2022 for the cryptosphere, 2023 will be a year of increased regulation, even favorable regulation. The mere presence of institutional investors in the crypto asset universe is not enough to give these instruments a credibility and legitimacy that is easily speculative.
The year just ended should be forgotten by fans of cryptoassets. After breaking the $3 trillion mark in November 2021, their market cap moved slightly over $2 trillion by the end of 2021 to stay at that level until March 2022, and then accelerated its decline to below $800 billion by the end of 2022. This is 60% erosion per year, about 75% from the top. In the cryptocurrency segment still dominating this universe, the CoinDesk index of the two major virtual currencies bitcoin and ethereum, claiming 42% and 20% capitalization respectively, fell 64% and 68% respectively in a year. The average drop in the token index exceeds 85%.
But beyond those crashes was the crash of the FTX exchange and the domino effect caused by what quickly became a huge, highly leveraged nebula with multiple offshoots. The write-off of Caisse de dépôt’s nearly C$200 million investment in the bankruptcy of the Celsius platform and the conversion of 2.5 billion high-profile managers such as Ontario Teachers and BlackRock to FTX reminds us that even the presence of large institutional investors is not enough to even morally approve this speculative aspect of digital finance.
Only regulation and regulation that provides tighter oversight and distancing between investors’ assets and intermediary operations will provide this much-needed credibility. FAIR Canada noted in its year-end report that Canadian securities regulators have been very active in this regard. In taking steps to ensure that crypto-asset trading platforms operating in Canada register under securities laws, an entity tasked with protecting the rights of investors cites the Financial Post, for which the intervention has restricted FTX’s access to the Canadian market. , “which allowed Canadian investors to avoid the worst of the FTX crash.”
But we are only talking about digital exchanges and trading platforms. As for the assets being sold, at best we are working to limit or even stop transfers to traditional financial channels and the banking sector. On Tuesday, the U.S. Federal Reserve, along with two banking regulators, again warned the banking sector about the risks associated with trading in cryptocurrencies “likely to be inconsistent with safe and sound banking practices.”
Smart Prevention… In September, the White House went even further, directing various US government agencies to “intensify their response and accelerate the strengthening of laws aimed at regulating the digital asset sector and identifying gaps in the regulation of cryptocurrencies.” As part of the “responsible development of digital assets” guarantee, the possible application of preventive measures is aimed at the adoption of guidelines and rules regarding the risks associated with this ecosystem, including its use for money laundering or fraud.
Lack of traceability of asset owners, lack of transparency in governance, open door to illicit transactions, extreme price volatility, subjective underlying cost even for stable cryptocurrencies, lack of liquidity, limited monitoring of crypto platforms and issuers, lack of due diligence and capital requirements… The list of considerations is long and, however, is part of a larger universe known as digital and decentralized finance, which is important in its own right and is part of the long term.
… to management As part of this movement, the CFA Institute released a research paper on Wednesday that goes further. The recommendations call for harmonized regulation, which would first include the classification of crypto assets as securities or digital goods, and then the regulation of related services aimed at protecting investors and participants. There is also talk of technologically neutral regulation of digital finance, with particular attention to the degree of concentration of players and intermediaries, the protection of assets and the safety of values.
One chapter looks at defining the proper framework for decentralized finance lending and borrowing entities. The other is stable cryptocurrencies, which may have properties similar in certain respects to money market instruments, and therefore present systemic risk, with emphasis on the value of the “peg” or link serving as an anchor and independent verification of the basis or collateral.
We are there!
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