Is it me, or is it cold in here? Amid an unfolding crypto winter, which has seen numerous exchanges freezing withdrawals, job cuts, consolidations of the market, people losing their money and regulators baring their teeth, crypto looks more precarious and volatile than ever.
So how are crypto exchanges looking to weather this period amid a backdrop of global economic uncertainty?
Crypto veteran Jesse Brown, CEO of crypto exchange Himalaya Exchange, has been around the block(chain). Before taking on his current role, Brown was a blockchain architect for DTCC, the clearing and settlement platform for equity exchanges.
His key takeaway from working at DTCC is that everything is connected. “The number one thing you learn there is what’s called global systemic risk,” Brown tells FinTech Futures. And when the markets contract, “there can be a lot of problems”.
It comes down to pricing, Brown says, with the “huge capitulation in price” due to leveraged assets held by companies and retail investors. He adds much of the blame should be levelled at quantitative easing (QE), a monetary policy in which a central bank purchases financial assets in order to inject money into the economy to expand economic activity.
“I believe the Federal Reserve printed $3.3 trillion in 2020 and at that time, that was one-fifth of all the USD in circulation. So, people went out and bought a lot of crypto.”
And it wasn’t just the US, other countries, including the UK, have been at it for years. All of this has led to price inflation, Brown thinks, which leads to rehypothecation, a traditional finance term for over-leveraged assets.
“I think this is what caused the cascading effect here in the crypto space. Many crypto businesses made the same rehypothecation and fractional lending mistakes as their predecessors did in traditional finance in 2008.”
As such, there could be “another leg down”, Brown thinks. “I’ve always believed that the market can contract 84% at any given time from a high, which it has done multiple times.”
For one, Brown says there’s probably “way too many” altcoins, with plenty of room for some to be weeded out. He refers to lawsuits being filed thanks to some exchanges “getting caught up in the hyperbole”, pumping up the value of coins.
“We need to get away from that and more into what traditional finance does when they launch an IPO or something similar,” Brown says.
That means regulation – there are certain things you are permitted to do marketing-wise, with only so much you can say to individual investors. Brown thinks there will always be those “investors on LinkedIn who are jumping up and down saying ‘crypto is dead’”, as they do every time there’s a dip.
“But in the long run, once we start to get these rails in place, I think that those types of investors will start to get into the market as well.”
It’s important to remember that the market volatility we have seen in the crypto space is not confined to this area of finance. All markets, equities, bonds, treasury, “they’re all influenced by these high prices from quantitative easing around the globe for decades now and the time has come to pay the piper”, Brown says.
Regulators, mount up!
Because crypto is in the institutional phase, regulators are beginning to enter the market. With people’s life savings frozen or evaporated, bad actors capitalising on the novelty of the space as well as a lack of standards, more regulation and governance designed to protect people is needed.
“Terra really caught a lot of people’s attention and there could be a few more incidents along those lines,” Brown thinks.
Himalaya has been “very proactive” around regulation and compliance jurisdictions, Brown says, adding: “We’ve done a lot of things right in that regard.”
But the fragmentation within the regulatory space makes things tough for exchanges. It’s difficult to obtain licences and application processes are lengthy. It will be some time before regulations are unified across jurisdictions around the globe.
“Quite frankly, the jurisdictions aren’t even ready. Some of them are still waiting for guidance on what to do, so it’s tough sledding that way right now.”
Regulators need to step up to the plate and accelerate the process. “Get them in place so we can do what we need to do,” says Brown.
The future of crypto
Despite the fragmentation in the compliance and regulatory space, the growth of crypto seems unstoppable. Opportunities still abound, despite the inherent volatility. Blockchain and central bank digital currencies (CBDCs), for example, are only going to grow as we are still very much in the preliminary stages of adoption.
“The market will eventually mature and figure it all out but they’re still going through some rough spots with security and true ownership rights,” Brown says. But it’s still early days. Major corporations are showing interest in the future of crypto. This alone will ensure its survival, certainly in the medium-term. However, there will be many failures along the way.
“There will be a lot of money that doesn’t get a return on investment (ROI),” Brown says. “But some will do very well.”
“What typically happens in these winters is the hype dissipates a little bit,” Brown says, and the hard work begins. While decentralised finance (DeFi) will still be a major player in the space, traditional finance is seeing a lot of effort and thought within banks and other financial institutions to make blockchain technology work.
From a centralised point of view, crypto is going in the direction of US Treasury-led hard assets being tokenised, which will open up whole avenues for the use of crypto as they become more reliable and stable.
“That’s sound money and when sound money enters the market, I think that’s going to be the next phase,” Brown believes. Tokenised securities, bonds and hard assets are going to really drive traditional finance, with DeFi having a seat at the table as well.
“Crypto isn’t going anywhere, it’s just going to build over time and become a big part of global finance.”
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