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The passing year may very well be considered seminal when it comes to the evolution of cryptocurrencies and Web3 in general. Numerous events across the globe, some tragic, have put digital assets in the scopes of financial regulators like never before — prompting many to conclude that the sector has finally “gotten serious” this year.
At the same time, the mass adoption of cryptocurrencies continues unabated among regular users and institutions alike, and this trend will only grow in 2023 and beyond.
The main event that affected crypto — and the whole world — over the past year is undoubtedly the war in Ukraine. When it began, governments around the globe realized that it was possible to send millions of dollars worth of digital assets to a country to buy weapons — without any oversight. While the Western world agreed this was acceptable in Ukraine’s case, it dawned on policymakers that the same could be done for any terrorist organization.
As a result, Germany’s Federal Intelligence Service (Bundesnachrichtendienst) and the FBI started hiring tech specialists en masse to mitigate the risk of Russia subverting sanctions via crypto.
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This is where Western law enforcement agencies started putting more focus on regulation.
In turn, and in what was the second-biggest event for crypto, came the Queen’s Speech in the U.K., which set out the government’s plans to introduce legislation to reduce economic crime and help crypto businesses grow. Correspondingly, the European Parliament introduced a legal framework for crypto assets in the EU in March 2022 to “boost benefits and curb threats” of crypto. Moreover, the U.S. Securities and Exchange Commission recently announced that it would make cryptocurrencies its focus going forward, setting forth plans to enact its own regulations.
While heated debates about crypto regulation have been taking place for years, we now know that regulators are in favor of championing new technologies while ensuring consumers are protected and criminal elements removed. This represents a watershed moment for crypto — the point at which the industry grew up.
Crypto tech needs to “disappear”
As for where we go next, when it comes to the mass adoption of cryptocurrencies, we really need the technology to “disappear.” In other words, it shouldn’t be visible to regular retail users, nor should they need a degree in cybersecurity to be able to interact with it. This starts with the basics, i.e., user experience. You can’t expect people to remember highly complex addresses or write down 12 random words on a piece of paper.
Moreover, the idea of decentralized finance (DeFi) and “Not your keys, not your coins” is a fallacy — more money has been lost due to people misplacing their keys than via any exchange hack ever. DeFi is a great tool when you know exactly what you’re doing, but that can’t be applied to the vast majority of users, especially those who aren’t crypto-native.
Most people don’t care whether they spend crypto or fiat currencies when swiping their phones at a grocery store. To become truly useful, these intricacies need to disappear “under the hood” so users won’t be inundated with superfluous technological challenges.
Institutional involvement in 2023
Meanwhile, it’s not only retail users that can benefit from the seamless integration of crypto into traditional finance systems. Over the past years, many institutional companies and brands have started to dip their toes into decentralized technologies, and this trend will pick up even more steam in 2023.
For example, brokerage giant Fidelity Investments recently launched a new crypto trading product for retail investors. Meanwhile, a lot more non-crypto-native firms and even family offices have started to actively look for new ways to get involved with digital assets.
Notably, some of them did get into crypto via prominent and well-respected, at least at the time, crypto platforms — some of which haven’t turned out so well. So going forward, these firms will focus even more on due diligence, and that’s why regulatory frameworks will need to evolve further.
Firms should be able to discover their crypto partners’ backgrounds, where the assets are, how they are stored and whether they’re compliant — everything you expect to be able to find out about your bank, essentially.
Further, more non-crypto platforms will likely start offering digital products in 2023. This will likely result in an ecosystem where financial services tend to merge. Instead of different apps for insurance, savings, bank accounts or crypto, we will see the concentration of different trading options and savings and retirement plans in the fintech space.
For this to happen, however, certain elements need to be anchored in authority. Even DeFi platforms still depend on centralized operators, like stablecoin issuers, for instance, so there is no such thing as “absolute” decentralization.
Ultimately, digital assets will become “the norm” and so ingrained in our day-to-day life that even the term “crypto” itself will disappear in just a few years. Web3 will become an inextricable part of the worldwide financial system and services going forward.
Larry Fink, CEO of investment monolith Blackrock, has already nodded toward this future, noting that “the next generation for markets, the next generation for securities, will be tokenization of securities.”
With blockchain tech offering reduced fees, reduced reliance on intermediaries, and instant settlement, its introduction into the traditional financial system is a no-brainer. In turn, this will bring much-needed legitimacy to the sector, further validating existing products and fostering greater adoption.
“Crypto winter” is a time for building
As for the current “crypto winter,” it could actually be a net positive for the industry in the long term. Even though many are referring to this period as the harshest crypto winter in the industry’s history, the builders and the developers haven’t gone into hibernation.
Instead, the industry is working hard to bring out better products and services. Algorand boosted its performance by more than five times via a network upgrade in September. And the Ethereum Merge — which saw the network transition to the more efficient proof-of-stake mechanism — went off without a hitch, increasing Ethereum’s sustainability credentials and paving the way toward greater scalability in 2023.
So, while some projects have fallen this year, and some have been washed out of the market, the industry hasn’t come to a standstill. Valuable lessons have been learned this year and will, in turn, create better, more trustworthy and more secure services as we go into 2023. As crypto gets serious, so will the considerations of adoption from mainstream firms and audiences.
Martin Hiesboeck, Ph.D. is head of research at Uphold and a consultant for data analytics, blockchain and crypto implementation, tokenization, DeFi, web3, stablecoins and CBDCs.