This year’s regulators finally have a handle on crypto?
2023 seems to have gotten off to a pretty good start for digital assets.
The instability of several crypto projects seems to have resolved itself temporarily, and it has been a few weeks since the last catastrophic headlines.
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Despite recent buoyancy and enthusiasm in the crypto market, we should not forget the challenges of 2022 so quickly.
First, many of the structural difficulties for crypto markets are in place, according to ZK Zheng, CEO of ZX Squared, a crypto hedge fund.
“2023 continues to be challenging for investors, especially during the first half of that year [Federal Reserve] remains hawkish, raising interest rates to control inflation,” Zheng said. “The current crypto bear market cycle may end when the Fed stops raising interest rates (hopefully by the second half of the year), and any remaining leverage in the crypto market is eliminated. This includes debt loans linked to certain major market players (investment companies, distressed assets, mining companies, etc.).”
Several of the notable developments of last year will help set the course for this year – not just the failures of FTX and Three Arrows Capital, but also the ongoing work to create a regulatory framework for digital assets in the financial services industry by government agencies.
With some of the more spectacular crashes in the digital asset space in 2022, coupled with the growing links between cryptocurrencies and the traditional financial system, 2023 is a year where regulators will need to play a more central role, according to Zheng.
“A crypto-regulatory framework needs to be established and further clarified for a new crypto bull market to emerge,” Zheng said. “It is absolutely critical to have regulatory audits and transparency to ensure that stablecoins are fully secure and centralized exchanges (CEX) are well capitalized to avoid repeats of [Terra] and FTX errors. This could also include a measure on how to manage the counterparty credit risk that was at the heart of the domino effects during this crypto winter.”
Nigel Green, CEO of one of the world’s largest wealth management firms, the deVere Group, struck a similar note.
“The time for endless platitudes about greater regulatory control is over. Action is needed,” he said in a statement. “If those present at the WEF do not advance the crypto-regulation agenda as a result of the 2023 summit, they will have failed spectacularly.”
Green gave three reasons why world leaders need to get serious about crypto regulation:
Any regulatory framework must balance protection of investors and the financial system with the decentralized nature of digital assets and the need for freedom to innovate, according to Green.
Green also recently commented on the rise in digital asset prices, noting that the recent crypto winter appears to be thawing.
“Obviously, the crypto market will not go in a straight line – no market ever does – but we expect the bears to hibernate and the bulls to be ready to run,” he said in comments over the weekend.
Zheng said regulatory clarity is needed for a long-term return to investor optimism.
“Crypto market cycles come and go,” Zheng said. “This time is no different than the previous three extreme bear market cycles during Bitcoin’s short 14-year history. The crypto market is driven by fear and greed, just like any other financial market. Bitcoin’s long-term mission remains intact. Crypto investor confidence will return especially when the market will be more appropriately regulated for institutional investors.”
