Crypto in 2022: Not everything was so bad

Thursday, December 22, 2022 3:32 p.m.

This year has been eventful, even by crypto standards. If the past twelve months have taught us anything, it’s that crypto is still a long way from being a mature asset class and time may be running out for the industry to prove itself as a functional cop. and beneficial in our financial system.

There are a number of hangovers the industry has given us throughout 2022, the most recent being the fantastic demise of Sam Bankman-Fried and FTX. Yet the crypto teardown began in May with another “wunderkind,” Do Kown of Terraform (Terra) Lab.

Terra-fying

Hailing from South Korea, Kwon was almost as celebrated in crypto as the man who made stablecoins – dollar-pegged tokens – viable. Stablecoins are basically IOUs that don’t offer interest, so when Terra offered 20% annual returns for holding terraUSD, the market frankly went crazy.

But anything too good to be true is often bad. The question is how much? On May 10, terraUSD broke its $1 peg, sparking a bank run that cost the crypto industry $40 billion in a fortnight, directly wiping around $83 billion of the whole of the crypto ecosystem.

In what would turn out to be Sam Bankman-Fried’s “Enron moment,” Alameda Research, a sister company of FTX, loaned more than $350 million to Terra-exposed companies, including brokerage firm Voyager, venture capital firm Three Arrows Capital and lender Celsius – all of which have since filed for bankruptcy.

Now Kwon is on the run, supposedly hiding in Europe. Interpol and South Korean authorities have placed the 31-year-old on a ‘red list’ for financial crimes – a good way to start his 30s.

saving grace

Unsurprisingly, regulators did not take kindly to Kwon’s antics.

The U.S. Treasury Secretary called the collapse a “real threat to financial stability” and CoiNDesk’s Nathaniel Whittermore said terra marked the “first time a mainstream mainstream was exposed to DeFi risks.” So, in a wave of reforms, policymakers around the world rushed to bring stablecoins and crypto into the remit of regulators.

In June, the European Union agreed on an Interim Document for the Framework for Crypto Asset Markets (MiCA), which is expected to come into effect in 2023 – the first-ever comprehensive and agreed crypto regulation. The UK followed suit in July, introducing a new Financial Services and Markets Bill to bring crypto into the scope of regulators. The Law Commission has now presented a proposal to include crypto-assets in UK commercial and common law.

While not all legal shenanigans are as exciting as the implosion of Terra or the corruption of Sam Bankman-Frieds, crypto will live or die at the hands of regulators. The intergovernmental decision to regulate crypto is long overdue and could be crypto’s saving grace.

big boys

Whether investors were looking to diversify their asset allocation in a low-yield environment or simply retest the “bitcoin is an inflation hedge” hypothesis, the arrival of the corporate giants put an end to any summer gloom .

BlackRock, the world’s largest asset manager, has braved the crypto turmoil by launching a bitcoin trust. In partnership with crypto exchange Coinbase, 82,000 institutional clients were exposed to bitcoin.

Following in BlackRock’s footsteps, abrdn bought a stake in UK crypto exchange Arachax in August, becoming the company’s largest shareholder. Earlier in the year, fellow asset manager Schroders took a stake in crypto asset management firm Forteus and Invesco and Fidelity launched bitcoin exchange-traded products in Europe.

This influx of institutional giants has changed the market structure of crypto industries. In September, investors spending more than $10 million per trade accounted for 80% of the bitcoin market. What started as a space inhabited by internet geeks was now in the hands of Wall Street goliaths.

Fusion

From the clutches of Wall Street to the very heart of the crypto beast, Ethereum this fall undertook perhaps the most ambitious technology update since the launch of Bitcoin in 2009.

On September 15, Ethereum transitioned from an energy-intensive Proof-of-Work (PoW) consensus mechanism to a sustainable Proof-of-Stake (PoS) system known as “the merger.” Transactions on the Ethereum network would no longer be powered by computing power but by investor deposits.

Going green was big. Estimates from the European Central Bank suggest that under the PoW, bitcoin and the Ethereum network consumed 470 TWh of electricity, the same amount as the total electricity consumption of Austria, the Netherlands and of Spain together. Today, Ethereum has reduced its energy consumption by 99.95%.

The merger had repercussions for the entire industry. Three-quarters of all NFTs were traded on the Ethereum platform, with the same number of DeFi projects calling the blockchain.

Sam Bankman Fried

Intern at Jane Street Capital in 2013 to become a billionaire in 2021 at the age of 28, Sam Bankman-Fried graced the pages of Time Magazine as one of the most influential people in May – six months later, it remains true but for all the wrong reasons.

Billed as “the” crypto prodigy, Bankman-Fried will appear before the U.S. Attorney’s Office for the Southern District of New York on charges of fraud and money laundering following the $32 billion collapse of his company FTX and Alameda in November.

Prompt by a report from CoinDesk that the majority of Alameda’s holdings were in FTT, FTX’s native tokens, Binance CEP CEO Changpeng Zhao revealed in a tweet that Binance is ready to sell all of its 529 million dollars of FTT raised through stock sales in FTX in 2021. To add fire to the fuel Zhao took to Twitter saying he thought FTT would be “very volatile in the coming days…”

On November 8, FTT lost 80% of its value, triggering a bank run and prompting FTX to file for bankruptcy. As regulators rushed into the first ascent to the surface. It has been revealed that Bankman-Fried may have illegally stolen $10 billion from FTX client funds to save Alameda – and that’s only scratching the surface.

Now, Bankman-Fried will appear before the U.S. Attorney’s Office for the Southern District of New York on charges of fraud and money laundering after being extradited from his home in the Bahamas where he was detained by local authorities.

Make no mistake, crypto is on trial. But all is not bad.