Crypto winter turns to deep freeze in 2022
It has been a hard year for cryptocurrency, with the ongoing crypto winter seeing prices crash and companies struggle through layoffs and stock dips. This can be largely attributed to the macroeconomic conditions affecting industry globally, but crypto’s volatility is unlikely to have helped. However, despite the drops, there are also some positive signs for the space.
The collapse of FTX: A blow to the already struggling crypto market in 2022
The biggest single story of the year, though, is the collapse of FTX. One of the largest cryptocurrency exchanges at its peak, the company fell apart in November and has since entered bankruptcy proceedings. The story is complicated and riddled with questionable financial decisions, but in its most basic form it appears to boil down to this:
- FTX did not have the assets it claimed to, or they existed as a token it had itself created (FTT). Those assets/tokens were also tied up in bad investments by Alameda Research, FTX’s partner trading firm.
- When FTX’s balance sheet was called into question, first by CoinDesk and then by rival crypto exchange Binance’s CEO Changpeng Zhao, FTX suffered what amounted to a bank run. FTT tokens not only accounted for a large portion of the company’s assets but functioned as a sort of pseudo-share; the combination of CoinDesk’s reporting and Binance’s subsequent announcement of intent to sell all their FTT holdings, the value of the token crashed.
- FTX entered a liquidity crisis, such that Binance briefly considered buying them before backing out after getting a look at the extent of their financial issues.
- The company’s CEO, Sam Bankman-Fried, has since been replaced as the company enters into bankruptcy proceedings, but the fallout has brought down several other companies either damaged by the blow to general crypto confidence or that found themselves too closely tied to FTX and the FTT token.
Although the most severe example, FTX wasn’t the only scandal to hit the crypto space this year. It came in the wake of a string of other issues, most notably around a number of “stablecoins” that had lost their peg over issues with the way they were backed. The most notable example, UST, saw its value collapse over issues with its algorithmic backing system. Significantly, fully audited and fully asset-backed stablecoins such as USDC and USDP were unaffected.
Green shoots in crypto payments
In more positive news, the Ethereum blockchain moved from proof-of-work to proof-of-stake methodology for validation in September. The transition not only promises to speed up transactions but dramatically reduces the environmental impact of the cryptocurrency, making it a far more appealing prospect for companies concerned with ESG targets.
This feeds into a growing separation we are seeing between the high-risk end of the market, which is increasingly tarnished by the damage of FTX, UST and other scandals, and the highly regulated, acceptable end of the market where we are still seeing new developments among payments players.
MoneyGram, for example, has continued to evolve its partnership with blockchain provider Stellar and stablecoin issuer Circle in 2022, adding the ability to buy, sell and hold major cryptocurrencies in its app in November.
There have also been various moves by regulators this year, which will likely be accelerated by the FTX crisis. EU lawmakers, for example, are claiming the bloc’s upcoming Markets in Crypto-assets legislation would prevent such scandals, and lawmakers in the US are exploring a variety of legislation in the space.
The reputation of crypto has been damaged this year, and with the value of key currencies having fallen significantly, there is significant hesitation in the space. However, there remain benefits for payments with blockchain-based technologies, particularly in terms of settlement speed, and so there are likely to be more developments in the future.
As regulation matures, expect more exploration of the space in the future, particularly with more tightly managed technologies such as central bank digital currencies.
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