Can trust in crypto be restored?

Volatility has seen faith in crypto-traded assets plummet for asset holders and those yet to trade in digital assets; how can trust be restored?

It goes without saying that crypto markets have gone through their fair share of volatility, ever since Bitcoin announced itself as the first coin on the blockchain. 

But, after crypto exchanges saw their worth soar in 2020 to US$826.6m, perhaps the biggest, and most reputably damaging blow to crypto’s integrity as a stable investment is FTX’s bankruptcy in November 2022. 

FTX’s valuation – standing at a mighty US$34bn – was wiped out almost overnight after major investors including Sequoia Capital and Softbank wrote their investments down to zero. 

So shocking was FTX’s collapse that Forbes says it represented crypto breaking its social promise, to deliver “a better, safer and more inclusive financial system, of the people, by the people, for the people.”

FTX collapse: One volatile swing too far?

However, if you ask UST’s Director of Innovation and Global Head of Blockchain, Daniel Field, crypto’s social promise “had been scuppered long before November 2022”.

For Field, “It had become a game of chicken over who and when, not if. This is not to dismiss the aspiration, but a reflection that promises from shady characters don’t count for much. 

“Paradoxically, that promise can only be fulfilled when people no longer believe in it and are more critical, more suspicious and more exacting.”

Perhaps then, crypto’s own mythology has contributed to its downfall. For IDnow’s Global Head of Crypto & Fintech, Jason Tucker-Feltham, XRP’s collapse “highlighted the importance of an unambiguous and robust regulatory structure in crypto”.

However, framing it in a positive light, Tucker-Feltham feels the collapse offered “the industry an opportunity to build from the ground up all over again, but this time with trust as one of its cornerstones”.

Herein lies the question: How can trust in crypto be restored? While its heartbeat may still be strong, as suggested by the Head of Crypto and Digital Assets at Synpulse, Janis Heibel, it is now about how the ‘industry can gear up for the next highs’ with trust being a central driving force.

Crypto’s dwindling trust: Not just XRP

But first, while XRP’s collapse may have damaged trust in crypto-traded assets, it’s not the only area where trust itself has either declined or failed to materialise in the first place.

UST’s Field feels the issue lies in people’s intentions for entering into the crypto space. He says: “Some crypto investors bought into the tech, others into the mythology of it and more just came for the returns. 

“When Bitcoin fell from its all-time high (ATH) crypto lost much of the latter group, who didn’t really care whether their capital was in stocks, crypto or commodities. Those who had really bought into the doctrine, overly emotionally invested and lacking experience, waited and bore the brunt.

“The mood switched from complacency and self-congratulation and has been tinged with an undertone of hopeful desperation since. These signals are picked up by the wider population who are consequently much more cautious.”

Meanwhile, for Tucker-Feltham, crypto’s innate anonymity has offered fraudsters a platform to thrive, dissuading many from taking an interest in decentralised digital currencies.

As he puts it: “Anonymity was initially a major attraction in the world of cryptocurrency, but as it’s become increasingly clear that exchanges with lax controls are being exploited by bad actors for illegal activity, that has understandably decreased the level of trust.”

How can trust in crypto be restored?

It’s clear that issues of trust concerning crypto go beyond XRP’s collapse alone. How, then, can trust be restored? Synpulse’s Heibel – much in the same vein as Tucker-Feltham – believes it is legal clarity that is lacking. 

“We need legal clarity, particularly in the US, where regulatory waters are muddy,” says Heibel. “Institutional adoption, as we're seeing in Switzerland or with the Blackrock Bitcoin ETF, will bolster confidence.”

To achieve adoption on an institutional level, Tucker-Feltham suggests an extension of the European Transfer of Funds Regulation (TFR) could assist in rebuilding trust in crypto. 

He adds: “At its heart, the TFR would identify the senders and beneficiaries of all crypto assets. Solid KYC procedures and digital identity verification would play a big part in this as they add a further level of trust to transactions.”

While more comprehensive regulations may offer a framework from which greater crypto trust can flourish, Field noted the importance of striking the right balance between such regulations and crypto idealism. 

“Either an authority curbs reckless behaviour and cavalier attitudes to others and ends up with some kind of regulation, or the investors collectively have to find increasingly sophisticated ways to mitigate the cost of bad actors – combatting both more sophisticated fraud and better-disguised consolidation of the market which create systemic risk,” he says. 

“A happy medium needs to be found. Consolidation appears to be a natural force in the crypto markets and so some kind of authoritative vigilance over the largest actors is called for. At the same time collective, constructive criticism from the investor community is healthy and should be welcomed and not shouted down by partisans.”

Crypto: the case for widespread regulations 

While consolidation may be the way to appease all players in the sphere of crypto, the consensus of our contributors is that this will undoubtedly involve greater regulation. 

Field believes that to improve the current tensions between crypto idealism and regulation, easy wins can be achieved. For him, “the easiest points are at the interface with banking, and particularly with stablecoins”. 

“Ensuring that stablecoins are adequately collateralised and avoiding monopolies will ensure money doesn’t leak from the system. Next, the exchanges need to be held to the highest standards of fair play,” he adds. 

“Finally, attention needs to be paid to healthy fragmentation. A healthy system can self-regulate, but only if the dice aren’t loaded from the start.”

Meanwhile, Tucker-Feltham reminds us of the Markets in Crypto Assets (MiCA) framework, calling it the benchmark from which other markets will judge broad-ranging crypto regulations.

He notes: “Across the Atlantic, the US is likely to be keeping a close eye on how the MiCA and TFR frameworks are implemented, as similar versions are likely to be put in place there if they prove to be successful in Europe.

“Following Brexit, the UK has the freedom to undertake its own in-depth look at these trust issues, rather than adopting the EU-wide approach and HM Treasury this year released a consultation paper that placed the importance of investor safety at its core.”

However, while it appears inevitable the future may hold stricter regulations. “Clarity, transparency and enforcement of those rules are paramount,” Heibel warns. 

“History proves it: in the 1930s, the US curtailed gold possession, leading many to hoard even more. Overly stringent rules might just exacerbate current challenges rather than resolve them.”

Crypto: Evolution over the next decade

So, with crypto’s decentralised identity and regulation in the balance, how will crypto look over the next 5-10 years? 

Heibel believes it will be an established asset class by this point.

“As more and more players of all industries will start leveraging the technology, trust will naturally surge. In fact, many people will interact with “crypto-powered” technology without even being aware of it. This development has already started.”

Field agrees, believing digital currencies will become mainstream in the next five to ten years. “It’s the convergence of multiple efforts from different fields across the commercial and financial sectors,” he says.

“That includes CBDC, and private stablecoins, tokenised commodities and other tokenised assets. It will start with high volume commerce and filter down to individuals over a slightly longer horizon.”

So, while crypto is set to be the digital asset class of the future, for now, it’s about striking the right balances to restore trust in a digital asset class currently in the doldrums of public opinion. But, fear not cryptonites, for this digital asset class will have its heyday. 

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