A year end perspective on cryptofinance (December 2022)

The bankruptcy of FTX has been the last major event of a market clean-up from overly-leveraged and poorly governed cryptofinance firms, that is still ongoing. I noticed two tangible regulatory / policy reactions, that shall, conditionally, boost DLT adoption in finance down the road, and deliver to finance the DLT benefits.

????the international policy consensus being built under the aegis of the G20, to inform a new wave of global cryptoregulation, that shall consider the impact of cryptofinance on the economy while strengthening (retail) investors protection and enhancing international collaboration. The FSB has anticipated regulatory steps in early 2023 to apply banking standards to cryptofinance, while several regulators request subjecting firms to licensing requirements.

????I expect a ‘historic recurrence’. The regulatory wave that followed the bust of the 2018 ICO bubble was instrumental to clean up the scams, instill investors’ confidence, allow new products, and support institutional adoption. The current events are leading the industry to set higher standards, investors and consumers to demand better governance and value propositions, and regulators to extend their perimeter to cryptofinance businesses – creating the premises for re-instilling confidence and boost cryptofinance adoption. The cost of doing business will increase.

????The key condition is sensible regulation, one that truly promotes the application of DLT technology to finance in a risk-controlled way.

????This leads me to the second regulatory reaction, the promulgation of the BCBS final rules for the prudential treatment of banks' exposures to cryptoassets. A key element of this regulation is the application of a maximum conservative capital treatment to (B/S) cryptoassets that do not represent tokenised traditional assets, evidencing the belief that only underlying reference traditional assets can provide cryptoassets with a risk / value profile, and that cryptoassets that miss this reference, miss any rational and logical value driver.

????This regulatory aspect is not sensible. It ignores the fact that the value of such cryptoassets comes from the value of the protocol they carry – evidenced by its usage or anticipated and potential usage, somehow analogue to an ‘operating system’ in the old days. Moreover, the existence and promotion of such cryptoassets is a condition for the existence and functioning of the tokenised cryptoassets in the first instance.

????It is essential that regulators and policy makers keep a pragmatic approach, dialogue with practitioners and take a global stance, while designing cryptoregulations. The private sector is asked to learn from the past bubbles and consider the expectations from the users and the policy makers, and design sustainable, innovative, DLT-based solutions.