By Stephan Roth
This year was turbulent, even by crypto standards. If the past twelve months have taught us anything it’s that crypto is still far from a mature asset class and time may be running out for the industry to prove itself as a functional and beneficial cop in our financial system.
There are a number of hangovers the industry has given us throughout 2022, the most recent being the fantastical demise of Sam Bankman-Fried and FTX. Yet, crypto’s unravelling started in May with another ‘wunderkind’, Terraform (Terra) Lab’s Do Kown.
Terra-fying
Hailing from South Korea, Kwon was almost equally celebrated throughout crypto as the man who made stablecoins – tokens pegged to the dollar – viable. Stablecoins are effectively IOUs that don’t offer interest, so when Terra offered 20 per cent annual yields for holding terraUSD, the market quite frankly went nuts.
But anything too good to be true is often bad. The question is how bad? On 10 May, terraUSD broke from its $1 peg, kickstarting a bank run that cost the crypto industry $40bn in the space of a fortnight, directly wiping an estimated $83bn from the entire crypto ecosystem.
In what would prove to be Sam Bankman-Fried’s ‘Enron moment’, Alameda Research, a sister company to FTX, lent more than $350m to firms exposed to Terra, including brokerage firm Voyager, venture capital firm Three Arrows Capital and lender Celsius – all which have since filed for bankruptcy.
Now Kwon is on the run, supposedly hiding in Europe. Interpol and South Korean authorities have placed the 31-year-old on a ‘red list’ on charges of financial crimes – a fine way to start your thirties.
Saving grace
Unsurprisingly regulators did not take well to Kwon’s antics.
US Treasury secretary called the collapse a “real threat to financial stability” and CoiNDesk’s Nathaniel Whittermore said terra marked the “first time a big mainstream audience was exposed to risks fo DeFi”. So, in a wave of reform, policymakers across the globe rushed to bring stablecoins and crypto into the remit of regulators.
In June, the European Union agreed on a provisional paper for the Markets in Crypto Assets (MiCA) framework, set to come into play in 2023 – the first-ever agreed-upon and comprehensive crypto regulation. The UK followed suit in July, introducing a new Financial Services and Markets Bill to bring crypto into the scope of regulators. Now the Law Commission has presented a proposal to include crypto-assets in British commercial and common law.
Despite all the legal shenanigans not being as exciting as Terra’s implosion or Sam Bankman-Frieds corruption, crypto will live or die at the hands of regulators. The cross-jurisdictional move to regulate crypto has long been overdue and may be crypto’s saving grace.
Big boys
Whether investors were looking to diversify their asset allocation during a low-yield environment or simply retest the ‘bitcoin is a hedge against inflation’ hypothesis, the arrival of the corporate giants put an end to any summertime sadness.
BlackRock, the world’s largest asset manager, braved the crypto turbulence by launching a bitcoin trust. Partnering with crypto exchange Coinbase, 82,000 institutional clients have gained exposure to bitcoin.
Following in BlackRock’s footsteps, abrdn purchased a stake in British crypto exchange Arachax in August, becoming the firm’s largest shareholder. Earlier in the year, fellow asset manager Schroders took a stake in crypto asset management firm Forteus and Invesco and Fidelity launched bitcoin exchange-traded products in Europe.
This influx in institutional giants changed the crypto industries’ market structure. Come September, investors spending more than $10m per transaction accounted for 80 per cent of the bitcoin market. What once started off as a space inhabited by the geeky denizens of the internet was now in the hands of Wall Street’s goliaths.
The Merge
From the clutches of Wall Street to the very heart of the crypto beast, in autumn Ethereum, undertook perhaps the most ambitious technological update since the launch of Bitcoin in 2009.
On 15 September, Ethereum transitioned from an energy-intensive proof-of-work (PoW) consensus mechanism to a sustainable proof-of-stake (PoS) system known as “the Merge”. Transactions across the Ethereum network would no longer be fueled by computational power but by investor deposits.
Going green was big. Estimates from the European Central Bank suggest that under PoW, bitcoin and the Ethereum network consumed 470 TWh of electricity, the same amount as the entire electricity use of Austria, the Netherlands and Spain combined. Now, Ethereum has reduced its energy consumption by 99.95 per cent.
The Merge had impacts across the industry. Three-quarters of all NFTs have been traded across the Ethereum platform, with the same amount of DeFi projects calling the blockchain home.
Sam Bankman-Fried
An intern at Jane Street Capital in 2013 to becoming a billionaire in 2021 at the age of 28, Sam Bankman-Fried graced the pages of Time Magazine as one of the most influential people in May – six months later that holds true but for all the wrong reasons.
Heralded as ‘the’ crypto wunderkind, Bankman-Fried will stand before the US attorney’s office for the Southern District of New York on charges of fraud and money laundering following the $32bn collapse of his firm FTX and Alameda in November.
Prompted by a report from CoinDesk stating that the majority of Alameda’s holdings were in FTT, tokens native to FTX, Binance CEP Binance CEO Changpeng Zhao revealed in a tweet that Binance was ready to sell all of its $529m worth of FTT garnered as part of equity sale in FTX in 2021. To add fire to the fuel Zhao took to Twitter saying that he believed FTT to be “highly volatile in the coming days…”
On 8 November FTT lost 80 per cent of its value sparking a bank run and prompting FTX to file for bankruptcy. As regulators rushed in the first rose to the surface. It was revealed Bankman-Fried may have illegally stolen $10bn in FTX customers’ funds to save Alameda – and that’s just scratching the surface.
Now, Bankman-Fried will stand before the US attorney’s office for the Southern District of New York on charges of fraud and money laundering after being extradited from his home in the Bahamas where he was detained by local authorities.
Make no mistake, crypto is on trial. But it’s not all bad.
The post Crypto in 2022: It wasn’t all bad appeared first on CityAM.
