Today, the word “volatile” remains a very appropriate description of the crypto asset market. Many people even refer to the current state of the market as “Crypto Winter,” based on the significant loss of value in crypto asset prices over the second half of 2022. Traditional asset markets and economies are dealing with similar challenges as well, and risk-on trading in growth assets has pivoted to risk-off positions in value assets. 

Aside from the overall macroeconomic environment and a general move away from riskier assets, the industry-specific crypto asset market turmoil over the past few months, including FTX’s collapse, has also given pause to newer entrants and capital inflows in the space. However, where some see danger in those troughs and peaks, others see opportunity —  not just in the potential for asset appreciation in the future, but more importantly, in the foundational technology behind digital assets and currencies. 

Digital asset innovation

It’s important to note that the events that have transpired in the crypto asset market in 2022 are concentrated in the market structure for crypto as an asset class, and not the broader digital asset technology space. Nearly all of the challenging news over the past six months have been about centralized entities and not on the underlying technology stack. Many in the industry have clarified this point as well, including the Monetary Authority of Singapore, which has said it is seeking to restrict cryptocurrency speculation but continuing to support digital asset innovation. 

The reality is that large financial institutions and incumbents see the benefits of smart contract-based blockchain infrastructure and recognize that related, innovative financial instruments are essential to building future financial services. It’s no surprise that our 2023 Global Innovation Report revealed that a majority (71%) of financial services firms globally recognized decentralized finance (DeFi) to be a major growth opportunity for their organization. 

Our research also found the lack of clarity around crypto regulations to be the biggest barrier to greater adoption. As regulatory support and clarity continue to mature, it will create comfort and safety for new capital inflows into digital assets. I believe we’ll see an important pivot in 2023 in increased regulatory clarity, not just for crypto and stablecoins, but greater awareness of how Web3 technology can re-platform and support assets within existing regulatory frameworks. This will accelerate certain use cases and regional product build-outs. 

What’s next in 2023?

In response to the market events of 2022, we are already seeing some notable improvements in the increased pace of regulatory policy development, increased emphasis on risk management and control by key industry players, and an overall sense of industry focus on its core value proposition and purpose. 

Additionally, there are still areas where growth and investment continue at a strong pace, including enterprise investment and pilot adoption of underlying Web3 technologies, central bank digital currency (CBDC) advancements and pilots, institutional investors deploying capital into digital assets, and overall venture capital support for the ecosystem. 

These initiatives are all driven by a long-term technology investment cycle and outlook, which most industry participants — and even many non-industry participants — agree has not changed, though the path between today and tomorrow may be longer and more complex than anticipated.

In terms of institutional adoption, we should expect to see continued and growing demand for three important streams of innovation:

  • Tokenization of real-world assets: The tokenization of real-world assets using Web3 technology to better connect disparate pools of issuer and investor capital, for example in connecting private equity fund managers and wealth management investors.
  • Stablecoins in B2B value flows: Stablecoin use cases will start to take shape in business-to-business payments and other value transfer use cases that are inefficient and slow today, for example in cross-border flows between businesses and business entities.
  • Extension of existing businesses: Established administrators, custodians and brokers will all continue building out the pipes connecting digital assets into their services for fund managers and wealth managers —  not just for cryptocurrency but for all digital assets.

Although much of the speculative retail growth in crypto and other asset markets in this latest investment cycle has retreated over the past six months, as with other market downturns in history, trading volumes and asset prices will one day grow again. We have to remember that we’re still at the beginning of the journey. Institutional investors will continue to move in, and traditional enterprises will build and apply the technology to ensure they stay in the transactions and capital flows across the industry. 

There is no doubt that the recent crypto asset market events have made the road ahead more challenging, however, we expect the industry response and renewed focus on Web3 infrastructure adoption to yield more robust long-term benefits to the financial services industry as a whole.