Crypto was a constant in 2021 and nobody quite expected it. Prices boomed, investment did as well, and corporations that had previously given the products a cold shoulder came on board. Experts tell VIXIO why 2022 may be the biggest year yet.
"2021 could have been the biggest year yet for cryptocurrencies in terms of profile, price, volatility and attention from regulators. It was a really significant year for decentralised finance considering blockchain as a central intermediary has also grown,” said Clive Cunningham, a partner at Herbert Smith Freehills.
In terms of the financial sector, many are assessing the potential of crypto-assets, and I expect this to become a bigger issue next year, he predicted.
“Crypto is just starting,” agreed Shidan Gouran, Canada-based founder of bank Gulf Pearl. “I believe that the global cryptocurrency market cap will increase at least ten times from its current value of over $2.2trn by 2024 and that close to one billion people will own cryptocurrencies of some kind.”
He is not alone in this optimistic outlook, with Goldman Sachs recently predicting that Bitcoin’s price could reach $100,000.
Gouran added this is likely to be achieved via the likes of video games and their in-game digital assets. “I have no doubts that gaming digital assets will be federated across platforms and live on open, public blockchain networks within the next two years as the norm, not the exception,” he suggested.
“The existence of these types of assets and the fact that they can be easily traded with other cryptocurrencies, such as Bitcoin, will mean that the whole space will see a massive influx of new holders,” Gouran said.
When this happens, you will see governments wanting much more control of this space and could result in one of the biggest shifts in government policy since the 1850s, he predicted.
Of course, governments have already shown keenness to introduce more stringent regulation in the crypto space, as evidenced by increasing enforcement actions by regulators, particularly in the United States, as well as the beginnings of legislative interventions, such as the Markets in Crypto-Assets proposal from the EU.
Yet, a regulatory framework in the next 12 months seems unlikely, at least for the UK, according to John Ahern, a partner at Covington & Burling, suggesting that the UK will instead wait to see what the EU’s final regulation will look like. "The UK needs to be a welcoming place for investment, and there is a desire to encourage innovation in the market, with legislative proposals that are similar to the rest of Europe.
"To an extent, there can be advantageous arbitrage opportunities for the UK, who will be selective about what is regulated. Yet, government and regulators won't ignore issues such as stablecoins, despite the potential for divergence after Brexit,” he continued.
For Cunningham, there are very clear signs that the regulators have stepped up the pressure, and they are putting existing regimes to use, but it is just the beginning in terms of regulation.
The focus so far has been on issues such as anti-money laundering (AML) and the proceeds of crime, he pointed out.
For example, the Travel Rule, sculpted by the Financial Action Task Force and in the beginnings of implementation in the EU, whether at the member state level, in Germany and Estonia, or via the EU’s latest AML package.
The Travel Rule puts an obligation on crypto service providers to collect and make accessible full information about the sender and beneficiary of the transfers of virtual or crypto-assets they operate, in line with what payment service providers currently do for wire transfers.
This ensures traceability of crypto-asset transfers, meaning it is easier to identify possible suspicious transactions and, if necessary, block them.
“There is a pattern of regulators trying to supervise these markets better, without stifling innovation,” said Cunningham. "Countries are moving at a different speed. The UK, EU and some in Asia are taking a proportionate, slowly, softly approach while others like China have come down tougher."
For example, the New York State Department of Financial Services (NYSDFS) announced it had hired former financial services consultant Peter Marton as virtual currencies chief last week.
The question of regulation of cryptocurrencies in the United States has been discussed in various guises over recent years both at state and federal level, said Eloisa Marchesoni, a crypto consultant and investor, adding that rules that are due to take effect, such as through the Infrastructure Bill and the Build Back Better Act, will mean added compliance procedures.
“The good news is that the provisions will not take effect until January 2024, and in the meantime, lobbyists within the cryptocurrency industry plan to push for amendments and standalone bills to adjust them,” she pointed out.
For Marchesoni, there are a plethora of issues that need to be addressed through crypto regulation, including online fraud, money laundering, cybersecurity risks, spam and many more. “The digital cryptocurrency and NFT world includes these dangers as default, especially for newcomers or holders that haven't been extra-careful throughout their whole journey, we could easily say that anybody is a potential victim and regulations must objectivise the priority of preventing it,” she said, adding that there needs to be the right balance between protection and innovation.
Gouran, meanwhile, talked down the prospect of there ever being a unified crypto framework to comply with. “Cryptocurrency networks can have characteristics, uses and societal implications that are widely different from one another.”
The only commonality between them, he argued, is that they are digital bearer instruments that can be potentially very liquid. “This fact places anti-money laundering and transaction reporting compliance of prime interest to the government and a common regulatory framework already exists across all relevant government institutions and agencies with respect to AML laws and identification.”
Going into 2022, it seems more than likely that things will carry on as they did in 2021. Financial institutions will continue to move into a territory once deemed completely unchartered and cult-like.
Regulators, meanwhile, will continue to grapple with how to evenly carve out rules that ensure a level playing field with far more compliance-heavy traditional financial services, while ensuring that the innovation continues and that consumer protections are balanced.