For the crypto-asset ecosystem, 2022 will remain special. After a year 2021, which will have been that of all records, with a trading volume of more than 14,000 billion dollars (compared to 1,800 billion in 2020), but also 30 billion invested by venture capital funds from e around the world (four times more than in 2018), cryptocurrencies were on the rise.
Hopes were therefore high for industry watchers at the dawn of 2022. However, nothing went as planned. Rather than being structured, the past year will have been a sizeable stress test for this ecosystem, which is now expected to turn a corner.
It is from the spring of 2022 that clouds have gathered in the cryptocurrency sky. And for good reason, if the price of these digital assets was bound by the turmoil of Wall Street until 2020, the adoption of bitcoin, and in general of crypto-assets, by financial institutions around the world has changed the situation. As technology stocks took a heavy hit on the Nasdaq, cryptocurrencies began to follow the dynamics of the stock market assets on the New York Stock Exchange, and therefore fell.
There was indeed the illusion of seeing bitcoin become a safe haven at the start of the war in Ukraine, but it was just a smokescreen. The provoking climate of anxiety in traditional markets, with increasingly cautious investors, spilled over into cryptocurrencies, which did not play the role of backfire as some speculators had hoped. The price of bitcoin went from €41,500 in early January 2022 to €15,600 a year later.
Terra Clash, “a phenomenon very close to Lehman Brothers in the cryptocurrency world”
However, this change in a bear market initially there was nothing necessarily threatening to the viability of the ecosystem. And for good reason, the sector is used to cycles of volatility. In addition, market contractions are also an opportunity to highlight players with stronger backs. But these market fluctuations were compounded by the crash of the stablecoin Terra in May, which led to the bankruptcy of the fund Three Arrow Capital and platforms such as Celsius Network and BlockFi.
Indeed, the stablecoin of the Terra ecosystem suddenly collapsed, causing investors to lose $40 billion and more than $500 billion in the cryptocurrency market in just one week. All because of a massive liquidation of several wallets and a faulty algorithm, which led to the collapse of the entire Luna (Terra) project, while it was among the most watched and anticipated initiatives in the entire ecosystem.
Consequently, its failure put a massive dent in an already depressed market. “I think we experienced a phenomenon very close to Lehman Brothers in the cryptocurrency world. There was a chain reaction behind it. We experienced it in 2008 with the subprime phenomenon on a much more dramatic scale unfortunately. But in the finance of crypto, which is less developed than global finance, the phenomenon is contained. The impact has been very violent, because it is still a very new sector.”analyzed Nicolas Louvet, co-founder and CEO of Coinhouse, with Digital.
Sam Bankman-Fried, the face of the crypto debacle
The cryptosphere was not at the end of its troubles and the year 2022 ended with a huge explosion caused by The FTX scandal. This crypto-asset exchange platform found itself in the spotlight after the revelations of specialized media at the beginning of November. CoinDesk, which shed light on the curious financial structure of the company Alameda Research, which was especially made possible by FTT, the symbol of the platform FTX. These two companies were founded by the same man: Sam Bankman-Fried, alias SBF.
In the days that followed, new revelations raised awareness of the fraud that was FTX and the illegal financial practices of its founder. SBF even had the audacity to install a backdoor in the accounting system, allowing him to discreetly execute commands to modify the financial documents of the company, which has more than a million customers desperately trying to recover their money.
Worse still, US authorities accuse the 30-year-old of embezzling billions of dollars and violating US election laws, paying large sums of money “stolen” from his investors to politicians to “buy influence” in Washington. Arrested in the Bahamas and then extradited to the United States, SBF faces up to 115 years in prison for all his work. On its own, it epitomizes the distrust rocking the cryptosphere at the moment.
Coinbase and Binance, giants under pressure
In this context, the behavior of market heavyweights that are still standing, such as Coinbase and Binance, will be watched very closely in 2023, both by investors and regulators. In fact, the two mentioned companies have not yet sent positive signals during the last months. Thus, Coinbase is in the center of attention of the American stock market policeman, the SEC (Securities and Exchange Commission). Anxious to keep up with the competition, Coinbase has continued to add new cryptocurrencies to its platform. However, for the US regulator, some of these signs fall under legislation on “securitiesIn other words, the SEC suspects that Coinbase offers its users securities that must be registered in its eyes.
To make matters worse, the SEC has already charged a former Coinbase executive, along with his brother and a friend, with insider trading. The latter are accused of carrying out illegal transactions in at least 25 crypto-assets, for a profit of 1.5 million dollars based on confidential information. In these conditions it is difficult to restore a climate of trust in the cryptosphere, especially since the American company has decided to lay off 18% of its workforce, i.e. approximately 1,100 positions, in mid-June, while its valuation has split almost sevenfold in a year. Shocked since the cryptocurrency crash, the company is no longer even in the top 10 cryptocurrency exchanges.
For its part, Binance is the first global exchange platform in this sector. It is a scarecrow in the market and no longer hesitates to play with the competition. In November, when FTX hit the wall, Binance claimed it wanted to save its rival, before playing with executors less than 48 hours after signing a letter of intent to buy the platform from SBF. This Machiavellian maneuver is a figment of Changpeng Zhao’s imagination, says CZ, the head of Binance, which sold its FTT tokens for $529 million after CoinDesk’s revelations about FTX. After that, the price of FTT fell, creating panic among investors who wanted to withdraw their assets as soon as possible, and de facto pushing FTX towards bankruptcy.
However, while CZ has managed to eliminate SBF and FTX from the crypto landscape, it still needs to show its credentials in some aspects of its platform business. Indeed, fifteen French investors have filed a complaint with the Paris prosecutor’s office against Binance, accusing the platform of engaging in fraudulent trading practices and violating French regulations governing crypto activities.
Since the Pact law of May 2019, digital asset service providers (PSANs) are required to apply for authorization from the Autorité des marchés financiers (AMF) to carry out their activity on French territory. And if Binance has indeed received the AMF’s blessing in May 2022, the platform has not waited for this green light to market its services and promote them to French users, according to the plaintiffs’ lawyers. Allegations that the world leader in crypto-asset exchanges also brush aside. Desperate action by investors or a real violation of French regulations? This will have to be determined by the Paris prosecutor’s office. If not, the crisis of confidence rocking the sector will worsen further.
The cryptosphere will have to overcome a crisis of confidence in 2023
Although very cloudy, there are some operations in the crypto-asset landscape that can steer the ecosystem in the right direction. This is especially the case Union in the middle of September. Long awaited, this step marked a turning point for the sector. And for good reason, it is not the minors who validate transactions, as with bitcoin, but the validators who are responsible for ensuring the proper functioning of the network. With its new approach, Ethereum has become one blockchain consumes much less energy that consumes 99% less energy. Beyond limiting the pollution created by Ethereum activities, this operation will make it possible to tenfold the possibilities that this blockchain. In this way, Ethereum has a great chance to position itself as the cornerstone of Web3, heralded as the next major mutation of the web.
It is more with this type of operation than scandals like FTX that the crypto ecosystem will regain credibility. If calm gradually returns to the sector, 2023 could be the year of consolidation to allow the cryptosphere to mature. In addition to the innovations to take the turn of Web3, the arrival of international legislation, such as the MiCA regulation (Markets in Crypto-Assets) until 2024 in the European Union should make it possible to further regulate the sector to make it pass a title of young. It is at this price that investor confidence will return. For the cryptosphere, we just have to hope there won’t be any new SBF around…