The FTX fiasco dominated the news cycle at the end of the year. It followed what I have labeled the “contagion of incompetence” — the crash of the LUNA crypto network in May, the collapse of the crypto hedge fund 3AC in early July and, just weeks later, bankruptcy of crypto lender Celsius.

The entire year was sprinkled with hacks, rug pulls and ill-designed protocols leading to crypto scams. According to Forbes research, the industry lost nearly US$1.5 trillion worth of market capitalization in 2022, triggering an array of actions by regulators, a series of enforcement actions and mass liquidation of crypto assets, further adding downward pressure on crypto asset valuation. This not only caused panic amongst regulators over concerns about the stability of global financial systems, but also massive reputational damage to the entire industry and its workforce.

Historically, market changes in the crypto industry have been grassroot ones, with changes being driven by entrepreneurs and the community. Therefore, I am confident the industry will once again pivot and shift through these forces and emerge with a stronger foundation. For this to occur, however, the industry needs a sound market structure and systemic independence from current transactional systems. The industry must not only coexist with current market structures, but also act as a bridge for current asset classes.

The 2023 narrative for the crypto industry should start with new energy, include the application of existing technology innovations, center on growth and mainstream adoption, and involve regulatory clarity and technological innovation. I have taken a pragmatic approach to better define the digital asset space (shifting away from “crypto” as a catch-all term) and understand the utility of assets and value drivers.

The industry needs to focus on robust infrastructure investment that emphasizes processing efficacy for the verification and validation systems that blockchain and Distributed Ledger Technology (DLT) employ. It also needs sturdy scaffolding on which to build an edifice of transparency, data processing and the capacity to understand utility metrics. It must also discern between fraud, protocol design deficiencies, technical hacks and tokenomics design.

To employ true digital commerce powered by blockchain-based digital transaction systems and create robust Decentralized Autonomous Organizations (DAOs) that can digitally enter into contractual engagements with peer DAOs, we will need a significant investment in underlying infrastructure to embed trust and protect against the vulnerabilities seen in 2022, which had been building over the last decade. We cannot build decentralized castles on weak foundations. We will need a strong infrastructure layer, which includes (but not limited to) decentralized storage, compute, interconnect and structures supporting governance systems embedded into various protocols, starting from Layer 1 systems.

To that end, I have identified five perspectives that I believe will guide digital finance developments in 2023:
 

1. Shift from speculative asset to utility-based asset – a maturing in the “crypto for payments” market
In 2022, the crypto market saw significant growth as institutional investors entered the market, driving up the price of many cryptocurrencies. This trend was driven by a growing recognition of the potential for cryptocurrencies to serve as a store of value and a means of payment. The industry needs to focus on a shift from speculative to utility-based assets in the crypto asset market. The utility can only be driven by the increasing number of real-world applications for crypto and other digital assets, and the growing adoption of blockchain technology.

This trend of focusing on utility is likely to continue in the coming years, as more use cases for crypto and other digital assets are developed, and more people become familiar with the technology. The development of real-world use cases, such as decentralized finance (DeFi) and non-fungible tokens (NFTs), has helped establish their baseline value and utility beyond speculation (although this is debatable for NFTs). My hope for 2023 is that regulatory developments and increased government oversight provide more clarity and stability to the crypto market, making it more attractive to investors who are looking for utility-based assets with real-world applications.
 

2. Re-emergence of permissioned networks on public blockchain – driven by a demand for asset tokenization (a blockchain, and not Bitcoin, conversation)
The permissioned blockchain always emerges when public networks and related assets are in question. However, this time, the conversation is less about private networks than it is about permissioned structures on public blockchain utilities. As the conversation around tokenization of existing asset classes gains traction, this technology trend is taking shape as financial services and adjacent industries, especially in private markets, adopt blockchain and tokenization as their foundational transaction infrastructure.

The re-emergence of permissioned blockchain networks can be attributed to several factors, including the need for increased privacy and security in certain use cases, such as financial services and supply chain management. Permissioned blockchains can offer greater control over the network and its participants, as well as improved scalability and faster transaction times, and meet the burden of regulatory reporting requirements. Overall, the re-emergence of permissioned blockchain networks is a sign of the continued growth and evolution of blockchain technology and its use cases, and it will be important for the industry to carefully consider the trade-offs and challenges associated with this “private versus public” approach.
 

3. Heavy-handed regulation towards crypto – leading to a flight to quality assets
As governments and regulators around the world increase their scrutiny of the crypto market, investors may seek out high-quality assets that are less likely to be affected by regulations or enforcement actions. For instance, cryptocurrencies with a strong track record of security and compliance, such as Bitcoin or Ethereum, may be more attractive to investors than newer or less established assets. Similarly, cryptocurrency exchanges and other service providers that have a strong reputation for security, compliance and transparency may be more appealing to investors than those that are perceived as less reliable. We saw this during 2022 with a rise in institutional adoptions, such as hedge funds, pension funds and endowments.

As supporting financial institutions and market utilities gravitate toward regulatory certainty to support asset classes, wider support from mature financial institutions entering the crypto industry is leading the flight to quality limited assets. This has played an important role in terms of market depth and has set an example to other asset classes aspiring to achieve a Bitcoin-like quality characterization. Bitcoin does provide utility to institutional investors as a store of value, and not a payment or settlement instrument.
 

4. Era of creative destruction – storage, compute and interconnect
Infrastructure investment, file storage protocols, meaningful use cases of NFTs/gaming and new enterprise entrants, including permissioned DeFi, all represent creative destruction. In periods of rapid change and innovation, new and disruptive technologies displace established ones. During this era, the crypto market is likely to experience a high degree of volatility, with some cryptocurrencies and digital assets rising to prominence while others fade away.

However, along with the opportunities for growth and innovation, the era of creative destruction in cryptocurrency also comes with risks and challenges. The lack of regulation in many countries and the relative inexperience of many investors in the crypto market can make it difficult for startups, companies and individuals to navigate the complex and rapidly changing landscape. It is important for those involved in the crypto market to stay informed and adapt quickly to changes in order to remain competitive and successful.
 

5. Payments and settlement focus – a “back to basics” narrative
Bitcoin triggered a revolution, and it originally aspired to embody properties of money, such as a store of value, unit of account and medium of exchange. This conversation is back on the table to address the cross-border movement of money and related assets – still an unresolved issue – at a global scale. Bitcoin, the Lightning Network, stablecoins and Central Bank Digital Currencies (CBDCs) all are part of the narrative to solve this issue.

The rise of stablecoins and CBDCs also raises a number of challenges and risks, such as the potential for greater centralization, the need for adequate regulations to protect consumers, and the potential impact on financial stability and monetary policy. Bitcoin and the Lightning Network are being used by innovative payment service providers to embark on a global low-cost payment system, but stablecoins and CBDCs are likely to have a profound overall impact on the payment and settlement landscape as well. So, it is important for governments, financial institutions and market participants to closely monitor and adapt to these developments.
 

Conclusion
Wider adoption, technological innovation and regulatory clarity will continue to drive the adoption of digital assets in 2023. Regulatory clarity and consistency are also expected to play a major role in the growth of the crypto market. As governments and regulators around the world develop more comprehensive and consistent regulations for cryptocurrencies, it could provide a more stable and predictable operating environment for market participants and help increase the overall legitimacy and appeal of cryptocurrencies.

Overall, the crypto market is likely to continue to evolve and grow in the coming years, and there are many reasons to be optimistic about its potential. Of course, there are also risks and uncertainties associated with investing in cryptocurrencies as an asset class. Hence, our focus should turn to utility, which not only strengthens the use case narrative, but also provides a narrative of effective technology use and not just another speculative asset. This narrative is vital for long-term growth and will help repair the reputational damage of crypto as an industry.