Why 2022 Will be a Transformational Year for the Blockchain Economy
Let’s cut to the chase: the first four weeks of 2022 have been tremendously volatile for global cryptocurrency markets. In what is increasingly resembling a real-world butterfly effect in play, a number of seemingly unrelated factors–protests in Kazakhstan, a Central Asian energy blackout, geopolitical tensions with Russia, and a regulatory-minded US Federal Reserve–are all contributing to pump significant volatility into the cryptocurrency and digital assets market. In today’s entry, I strive to discuss the impact of these diverse variables on the blockchain economy, changes we can expect to see in this space over coming months, as well as some of the actors stepping in to address these issues.
To put it simply 2022 has been a bloodbath for cryptocurrency markets. As of January 27th, Bitcoin is down 21%, Ethereum down 34%, and Solana is down a whopping 47% (relative to the USD). Note that these momentous drops have not occurred in isolation, but are rather reflective of volatile global markets on tenterhooks over expected revisions to the US monetary policy and federal interest rates. Even so, the dramatic swings in cryptomarkets have erased trillions of dollars from digital wallets in a matter of weeks.
A number of geopolitical developments have also played an important role in stoking the recent bearish volatility. Rewinding a bit, in September 2021 China declared that all cryptocurrency transactions and mining are illegal. Formerly a global hub for bitcoin mining, the CCP’s blanket ban on crypto-related activities rattled global markets while leading to a major redistribution of mining activities to more receptive environments like Thailand, Kazakhstan, and the United States.
All has not been smooth sailing since, however; the next domino to fall was Kazakhstan which, as of January 2022, was home to18.1% of the global BTC hash rate (computing power for mining) , second in the world only to the US. The explosion of violent domestic unrest in the first week of the new year led to major economic disruptions, including in the crypto mining sector. Moreover, the outburst of popular discontent and the brutal regime crackdown undermined confidence in Kazakhstan’s viability as a stable home to crypto-computing infrastructure moving forward. But the woes didn’t stop there–a major power blackout hit the unified Central Asian grid on January 25th, depriving millions across the region of energy. The cause of the blackout is believed to be an accident in southern Kazakhstan that unleashed a devastating ripple effect. In its aftermath, overt criticism has been directed towards the country’s overburdened electric grid and crumbling infrastructure. As expected, these events in the remote heart of Asia contributed to the ongoing tumble of crypto prices.
On January 20th, as Russia continued a deeply concerning military buildup on Ukraine’s borders, Russia’s central bank issued a report that argued, “speculative demand primarily determined cryptocurrencies’ rapid growth and that they carried characteristics of a financial pyramid, warning of potential bubbles in the market, threatening financial stability and citizens.” In turn, the bank took the lead from China in banning the use and mining of cryptocurrencies within Russia. In days since the central bank has walked back some of the contents of the report, but this too has injected an extra dose of volatility into the market.
And lastly there’s the US government’s stance to take into consideration. Global investor attention is currency riveted on Washington and the Federal Reserve Board’s evolving strategy regarding interest rates, inflation, and the mushrooming national debt. But beyond macro-level monetary policy, US fiscal authorities are also weighing a crypto-crackdown of their own in 2022. Part of this is fueled by the massive levels of fraud and scamming being perpetrated across the field by actors that range from anonymous trolls to A-list celebrities like Kim Kardashian and Floyd Mayweather.
Another element of the equation deals with taxation (or the lack thereof) of digital assets and the looming confrontation between the DeFi space and public sector entities.
So what next? Who are the parties stepping into to address this expanding portfolio of concerns regarding the future of crypto-currency and digital asset trading?
In my analysis, we are beginning to see the emergence of two mega-trends that will determine the trajectory of the blockchain economy in years to come. The first is increasingly public-sector determination to crackdown on and regulate the trade and accruement of blockchain-based wealth. The second, related trend are a number of private sector actors working to refashion our approach to DeFi so that it respects principles of both privacy as well as regulatory compliance.
At the governmental level, authorities in both the US and the UK have begun to tow a similar line. On January 19th, SEC Chairman Gary Gensler stated that 2022 will feature the implementation of more robust oversight regarding how digital assets are traded, accrued, and taxed. A specific focus was placed on tightening regulatory supervision of trading platforms like Binance and CoinBase that have run into issues in the not-too-distant past. Following the lead of the US and others like Spain and Singapore, a UK fiscal watchdog has also raised the prospect that blockchain-based assets will be subjected to compliance with the Treasury’s Financial Conduct Authority (FCA) rules along the same lines that other financial promotions such as stocks, shares, and insurance products are held to. In short, a rising consensus is emerging among global financial hubs from the US to the UK to Singapore that the days are numbered for the prevailing “wild west” atmosphere of the crypto space.
In response, private sector actors are rushing to leverage this change in regulatory standards. The best example I have seen of this bottom-up approach is INX Digital, which had its initial public offering on Canada’s NEO exchange on January 24th under the symbol INXD. INX’s entire schtick is to provide a regulated, secure, and transparent exchange for the trading and digital tokenization of both traditional and blockchain assets. To date, INX has clinched SEC and FINRA approval for 1) supervised trading of BTC and ETH, and 2) the issuance of digital tokens as securities in order to raise capital and trade. The company also intends to implement the trade of blockchain derivatives, as well as a service for converting OTC securities into digital security tokens. From what I can see, INX is the only company currently in the blockchain-economy space with such a high level of US-regulatory compliance, granting them a substantial first-comers advantage to realizing their ambition to become the next Nasdaq for the world of digital assets.
From the looks of January alone, 2022 is already shaping out to be full of wild and unexpected events in the realms of geopolitics, macroeconomics, and the emerging blockchain universe. A consistent theme I predict we will see crop up repeatedly over coming months and years will be the collision between DeFi’s premium on anonymity and autonomy and the public sector’s growing regulatory concerns. Whereas autocratic states like China and Russia have tended towards the adoption of blanket bans, Western economies like the US, UK, and Singapore have hinted at tighter governmental supervision as an alternative to outright prohibitions. Meanwhile, a new generation of private sector entities like INX Digital are attempting to address the missteps made by companies like Binance and Coinbase in providing a SEC-compliant exchange for a more secure, more transparent, and less fraudulent blockchain ecosystem. I’m expecting more exciting developments and tangents in this space over the coming months, so tune in for more commentary and analysis. Meanwhile, I urge prudence and sang-froid for the investors out there fretting over global volatility, and re-iterate that this article is the expression of my personal opinion and should not be construed as financial or investment advice.