Movement into stablecoins or cold storage could also explain the trend
The relatively flat trend in global crypto usage may also be explained by some retail investors’ decisions to shift their holdings into stablecoins — cryptocurrencies pegged to another asset or fiat currency, usually the U.S. dollar — and away from unpegged coins like Bitcoin and Ethereum. Indeed, many crypto users fled to the perceived stability of pegged coins in the immediate aftermath of the major exchange collapses of 2022.
Alternatively, cryptocurrency owners who watched the value of their portfolios tumble in 2022 may be holding out for a rebound, either through bankruptcy proceedings or future price increases. In the United States, for example, increased numbers of cryptocurrency users said last June that they were putting their crypto into so-called cold wallets — offline storage devices for cryptographic keys — but not abandoning their holdings. This is bad news for exchanges that rely on transaction volume for fees, but it’s better news for the long-term future of the asset class than a major sell-off would be.
Persistently high adoption plus low trust portends global regulatory headwinds
High levels of popular ownership of an asset, coupled with large losses of value and trust, can supercharge regulatory processes. For example, in the United States in 2022, the meteoric rise and fall of meme stocks like GameStop stoked demand for new rules on brokerage trade flows.
Some jurisdictions like China and Egypt had banned most forms of cryptocurrency before 2022’s market turbulence. Meanwhile, the European Union and several other large markets were working on formulating tougher guardrails in the run-up to it. With retail investors — particularly those in emerging markets — making up the lion’s share of investors bearing losses from the 2022 rout, expect an acceleration of efforts to gain broader international buy-in for new rules for crypto.
International rules won’t hit fast, but they could hit hard
Heading into 2023, the International Monetary Fund, pointing to recent events, has repeatedly called for greater global coordination on cryptocurrency. And in December 2022, the departing head of the Financial Stability Board — an international body that monitors and makes policy recommendations on the global financial system — similarly signaled his preference for robust international cooperation on global standards for cryptocurrency in 2023, and expects them to materialize.
International financial diplomacy moves at a stately pace, but major world events can spur relatively prompt action, as in the case of the Basel III framework, which emerged fairly quickly in response to the international financial crisis of 2008. If the FSB announces a road map to new cryptocurrency regulation in the first half of this year, 2024 seems a reasonable time frame to expect major changes, as national authorities will need time to implement FSB rules via domestic channels after an international agreement materializes.
For cryptocurrency exchanges, a new set of rules would be a mixed bag. The fraud allegations surrounding FTX make stricter rules on the separation of custody and exchange activities particularly likely. Treating exchanges more like banks will subject them to more stringent requirements for customer onboarding, compliance and licensing, and documentation. For customers looking for safe havens from monetary policy in their home markets, coordinated controls will make it more difficult for them to move and protect their savings. On the flip side, reputable exchanges operating across jurisdictions will enjoy more regulatory clarity and should be able to scale with greater confidence. With net trust at a low ebb, crypto may, ironically, need to lean on regulators to regain the public’s trust after a harrowing year.
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