Cryptocurrency’s torrid year: growing regulation is a bright spot amid FTX scandal and price collapse

The ugly price plunge and FTX collapse probably outweighed the good work of growing market regulation as blockchain technology is increasingly utilised
But, taken together, there are very useful lessons in preventing a repeat of cryptocurrency’s problems

Leonard Hoh

Published: 7:30am, 25 Dec 2022

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Cryptocurrency markets have been through a lot this year – the ugly, the bad, but also the good. Prices have plummeted from the all-time highs of late 2021 and the FTX scandal closed out the last quarter of the year. But the other side of the coin is that cryptocurrency use is growing, such as in gaming, and regulatory momentum continues to build.

First, the ugly. There is nothing pretty about recent steep falls in cryptocurrency prices after the sustained rally that started in late 2019. Volatility has long been a feature of cryptocurrency markets but even bitcoin, the market proxy, is at levels not seen since 2020. Still, while this may have wiped out gains, it does not appear to have wiped out the optimism generated last year.

And then there is the collapse of the FTX cryptocurrency exchange. For its absence of corporate controls and lack of governance, FTX adds to a list of bad examples that stretch from Enron to WorldCom.

But a major force for good was the progress made in cryptocurrency regulation. Hong Kong, for instance, recently passed its landmark cryptocurrency law. With a growing list of governments mulling and passing regulation, adoption of digital assets continued at pace.

Taken together, the ugly, the bad and the good all provide valuable lessons.

First, we cannot continue to rely on the price of bitcoin as the sole arbiter of the sector’s performance. The use of cryptocurrency and innovations leveraging blockchain technology have increased and examples now underpin many parts of the economy.

The Asia-Pacific region represents 28 per cent of the world’s business-to-consumer e-commerce, and the value of this market is anticipated to grow by over 12 per cent year on year. Blockchain-powered payment platforms, such as FomoPay, Nium and Thunes, have helped to improve cross-border multicurrency transactions between buyers and sellers.

As such use cases grow, they inevitably touch on regulated sectors of the economy. This means regulation remains pivotal for the adoption and, ultimately, growth of not only digital assets but also the wider financial services sector. Hong Kong is just one of a growing list of major financial centres to adopt dedicated legislation for cryptocurrency.

As Hong Kong Monetary Authority CEO Eddie Yue Wai-man told the Legislative Council late last month, a good regulatory regime for virtual assets is the foundation for the city to explore blockchain-based financial innovations. In other words, not only do synergies exist between technology and finance, but regulation can be the basis for increased innovation, and not a barrier.

How cryptocurrency exchanges can regain trust in wake of FTX scandal

Regulatory convergence is also a lesson we must learn from the headline-grabbing collapse of FTX. The demise of cryptocurrency’s former poster child was in part the result of a lack of regulation. In being able to exploit regulatory arbitrage, FTX engaged in business practices it could not have carried out if there had been proper market surveillance.

It is cryptocurrency’s biggest corporate collapse, and has drawn comparisons with the downfall of Enron and WorldCom. But Enron was not oil’s biggest scandal and WorldCom was not the defining narrative for the telecommunications sector. And FTX’s failure stemmed from a breakdown in corporate governance, rather than cryptocurrency itself. Still, as an industry, we should not seek to deflect or move on. We should own it, learn from it and ensure it does not happen again.

02:27

Cryptocurrency volatility highlighted by China’s recent crackdown and Elon Musk comments

In the coming year, regulators must increase their coordination and speed of decision-making to prevent divergences that fuel regulatory arbitrage. We need to ensure that global frameworks stamp out bad actors, rather than encourage them to move from one vigilant jurisdiction to a more permissive one.

Regulation can be effective without being restrictive. In the new year, regulators can work on increasing their engagement with and education of investors, especially those who attempt risky workarounds on restrictions. For example, it turned out that mainland customers made up eight per cent of FTX’s customer base despite China’s central bank having banned such transactions last year.

Bringing more aspects of the digital asset markets under regulatory control, ensuring greater synergies in regulatory approaches between jurisdictions, and more regular investor education will go a long way towards preventing a repeat of the problems of 2022.

The bad and the ugly probably outweighed the good this year. But put them altogether, and what we can learn is significant.

We learned to talk less about what cryptocurrency is worth and more about what it does. We learned that education is vital to mainstream adoption and investor confidence. And we learned that broad and well-regulated markets, as well as support for more uses and participants within the sector, give us a way forward.

Leonard Hoh is general manager for Asia-Pacific at Bitstamp

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