2022 will remain a special year for the crypto asset ecosystem. After what will have been a record-breaking 2021, with more than $14,000 billion in trading volume (up from $1,800 billion in 2020), but also 30 billion in global venture capital funds invested around the world (four times more than 2018), cryptocurrencies were on the rise.
At the beginning of 2022, the hopes of industry observers were therefore high. But nothing went as planned. The past year has not been structuring, but rather a stress test of the magnitude for this ecosystem now expected at the turning point.
From the spring of 2022, the clouds have accumulated in the cryptocurrency sky. And for good reason, if the price of these digital assets was decorrelated from the Wall Street upheavals by 2020, the adoption of Bitcoin and more generally crypto assets by financial institutions around the world has changed the situation. As tech stocks took a serious hit on the Nasdaq, cryptocurrencies began to follow the dynamics of stock market investments on the New York Stock Exchange and fell as a result.
At the start of the war in Ukraine, there was indeed an illusion of making Bitcoin a safe haven, but it was just a smokescreen. The unsettling climate in traditional markets, with increasingly cautious investors, thus spilled over into cryptocurrencies, which did not play the role of return fire that some speculators were hoping for. The price of Bitcoin rose from €41,500 in early January 2022 to €15,600 a year later…
the crash of terra, “a phenomenon very close to Lehman Brothers in the cryptocurrency world”
This shift in a bear market initially had nothing necessarily threatening to the sustainability of the ecosystem. And for good reason, the sector is used to volatility cycles. In addition, market declines are also an opportunity to highlight the players with the strongest backs. But adding to these market volatility was the crash of stablecoin Terra in May, which led to the bankruptcy of the Three Arrow Capital fund and platforms like Celsius Network and BlockFi.
In fact, the Terra ecosystem stablecoin suddenly collapsed, causing investors to lose $40 billion and more than $500 billion in the cryptocurrency market in just a week. All because of a mass liquidation of multiple wallets and a buggy algorithm that led the entire Luna (Terra) project to its demise while being among the most watched and anticipated initiatives in the entire ecosystem. .
Consequently, its failure put a massive damper on an already deadlocked market. “I think we have witnessed a phenomenon in the cryptocurrency world that is very close to Lehman Brothers. There was a chain reaction behind it. Unfortunately, in 2008 we saw the subprime phenomenon on a much more dramatic scale. The impact has been very severe as it is a very young sector.”analyzed Nicolas Louvet, co-founder and CEO of Coinhouse Digital.
Sam Bankman-Fried, the face of the crypto debacle
The cryptosphere was not at the end of its troubles, and 2022 ended with a massive explosion caused by the FTX scandal. This crypto-asset exchange platform came under the spotlight following revelations by the trade media in early November CoinDesk, which shed light on the strange financial structure of the company Alameda Research, which was notably powered by FTT, the token of the FTX platform. These two companies were founded by the same man: Sam Bankman-Fried, aka SBF.
In the days that followed, new revelations drew attention to the FTX scam and its founder’s illegal financial practices. SBF would even have taken the liberty of implanting a backdoor in the accounting system, allowing it to discreetly execute commands to change the financial documents of the company, which has more than a million customers desperate to get their money back.
Worse still, the American authorities accuse the 30-year-old of embezzling billions of dollars and violating American election laws by paying large sums “Fly” to its investors to political leaders for “Buy Influence” in Washington. Arrested in the Bahamas and then extradited to the United States, the SBF faces up to 115 years in prison for all of his work. Alone, he embodies the distrust currently rocking the cryptosphere.
Coinbase and Binance, giants under pressure
In this regard, the behavior of surviving market heavyweights like Coinbase and Binance in 2023 will be closely watched by both investors and regulators. In addition, the two companies mentioned have not sent any positive signals in recent months. This puts Coinbase in the crosshairs of the American stock exchange police officer SEC (Securities and Exchange Commission). In an effort not to be left behind by the competition, Coinbase has continuously added new cryptocurrencies to its platform. However, for the American regulator, some of these tokens fall under the legislation to “securitiesIn other words, the SEC suspects Coinbase of offering its users securities that they believe should be registered.
To make matters worse, the SEC has already indicted a former Coinbase executive along with his brother and a friend of insider trading. The latter are accused of conducting illegal transactions involving at least 25 crypto assets based on confidential information, for a profit of $1.5 million. In these conditions, it is difficult to restore a climate of trust in the cryptosphere, especially since the American company decided in mid-June to lay off 18% of its workforce, or around 1,100 jobs, while being valued almost seven times in a year. Struck by the crypto crash, the company is not even in the top 10 cryptocurrency exchange platforms.
For its part, Binance is the industry’s first global exchange platform. It’s a scarecrow on the market and doesn’t even hesitate to play with the competition anymore. When FTX hit the wall in November, Binance pretended to want to save its rival before playing the hangman less than 48 hours after signing a letter of intent to buy the platform from SBF. This Machiavellian maneuver is the fruit of Changpeng Zhao’s imagination, says CZ, the head of Binance, which sold its FTT tokens for $529 million via FTX following CoinDesk’s revelations. As a result, the price of the FTT plummeted, causing panic and urgency among investors looking to withdraw their assets as quickly as possible de facto FTX into bankruptcy.
Although CZ managed to eliminate SBF and FTX from the crypto landscape, it still has to prove itself in certain facets of its platform’s business. In fact, fifteen French investors have filed a complaint against Binance with the Paris Prosecutor’s Office, accusing the platform of engaging in fraudulent business practices and violating French regulations on crypto activities.
Since the May 2019 Pacte law, Digital Asset Service Providers (PSAN) must apply for authorization from the Autorité des Marchés Financiers (AMF) to operate on French territory. And if Binance did indeed receive the AMF’s blessing in May 2022, the platform did not wait for that green light to market its services and promote them to French users, according to the plaintiffs’ lawyers. Allegations that the world’s leading crypto-asset exchange also denies. Desperate action by investors or genuine violation of French regulations? The Paris public prosecutor’s office must clarify this. If this is not the case, the crisis of confidence that is rocking the industry will only deepen.
The cryptosphere will have to overcome a crisis of confidence in 2023
Although very tarnished, there are some operations in the crypto-asset landscape that could steer the ecosystem in the right direction. This is especially true for The Merge in mid-September. This long-awaited move marked a turning point for the industry. And with good reason, it is no longer minors who validate transactions, as with Bitcoin, but validators who are responsible for the smooth functioning of the network. With its new approach, Ethereum has become one Blockchain much less energy consumption, which consumes 99% less energy. In addition to limiting the pollution caused by Ethereum’s activities, this operation will allow to increase the opportunities offered by it tenfold Blockchain. In this way, Ethereum has a great opportunity to position itself as the cornerstone of Web3, which is heralded as the web’s next major mutation.
More with this type of operation than scandals like that of FTX, the crypto ecosystem will regain some credibility. As calm settles in the sector, 2023 could be the year of consolidation to mature the cryptosphere. In addition to the innovations that will bring the Web3 to the line, the introduction of international legislation such as the MiCA (Markets in Crypto-Assets) regulation by 2024 in the European Union should allow the sector to be further regulated in order to adopt a new heading. At this price, investor confidence will return. For the cryptosphere, we just have to hope there are no new SAQs…