After a rather disastrous year 2022 for the cryptosphere, 2023 will be one of regulatory tightening, even beneficial regulation. The mere presence of institutional investors in the universe of cryptoassets is not enough to bring credibility and legitimacy to these instruments, which easily lend themselves to speculation.
unbridled.
The year that has just ended is something to forget for followers of cryptoassets. Surpassing the 3 trillion US dollar mark in November 2021, their market capitalization ended 2021 slightly above 2 trillion to stay there until March 2022 and then accelerate its fall to end 2022 below 800 billion. That is an erosion of 60% over one year, some 75% from the summit. In the cryptocurrency segment, still dominant in this universe, the CoinDesk index of the two major virtual currencies bitcoin and Ethereum, claiming 42% and 20% of capitalization respectively, slipped 64% and 68% respectively. % over one year. The average drop exceeds 85% for the token index
not fungible.
But beyond these plunges was the collapse of the FTX exchange and the domino effect caused by what quickly appeared to be a vast, highly leveraged nebula with multiple ramifications. The write-off of the Caisse de dépôt’s investment of nearly 200 million Canadian dollars in the bankruptcy of the Celsius platform and the reversal of 2.5 billion of renowned managers such as Ontario Teachers and BlackRock in FTX remind us that even the the presence of large institutional investors is not enough to endorse, even morally, this speculative aspect of digital finance.
Only regulation and regulation providing more hermetic supervision and distancing between the assets of investors and the operations of intermediaries will provide this necessary credibility. FAIR Canada noted in its year-end report that Canadian securities regulators have been very active in this regard. In adopting measures to ensure that crypto-asset trading platforms operating in Canada register under securities laws, the organization that has made it its mission to defend the rights of investors cites the Financial Post for whom this intervention limited FTX’s access to the Canadian market, “which allowed Canadian investors to escape the worst of the consequences of the collapse of FTX”.
But we are only talking about digital exchanges and trading platforms. As for the assets traded, at most we are working to limit or even stem the transmission to traditional financial channels and the banking sector. Again on Tuesday, the US Federal Reserve, alongside two banking institution regulators, once again alerted the banking sector to the risks associated with activity in cryptocurrencies “most likely incompatible with safe and sound banking practices”.
Prudential prevention…
In September, the White House went a step further by ordering various US government agencies to “step up their responses and accelerate the strengthening of laws aimed at regulating the digital asset sector and identifying gaps in cryptocurrency regulation” . Under the guarantee of “responsible development of digital assets”, the possible application of preventive measures is targeted through 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 holders, opacity of governance, open door to illicit transactions, extreme price volatility, subjective underlying value even for stable cryptocurrencies, lack of liquidity, limited monitoring of cryptocurrency platforms and issuers, absence of verification and capital requirement… The list of considerations is long and is however part of a larger universe known as digital and decentralized finance which, itself, is essential and is part of the long term.
… to governance
In this movement, the CFA Institute published a research document on Wednesday that goes further. The recommendations call for harmonized regulation, which would first involve classifying cryptoassets as securities or digital commodities, then regulating related services aimed at protecting investors and participants. There is also talk of technologically neutral regulation of digital finance, with particular attention paid to the degree of concentration of players and intermediaries, the safeguarding of assets and the safekeeping of values.
A chapter deals with the definition of the appropriate framework for decentralized finance actors engaging in lending and borrowing activities. Another to stablecoins, which may have similar properties, in some respects, to money market instruments and therefore represent systemic risk, with an emphasis on the value of “ peg ”, or the link serving as an anchor, and on the independent verification of the underlying or the guarantees.
We are there!