5 Crypto Predictions for 2023
U.S. banking giant acquires leading crypto centralized exchange, encouraging global adoption
“On-chain” use cases increase dramatically
U.S. regulations escalate
CBDCs surge
CeFi is down, DeFi is up
Introduction
Blockchain’s potential to transform the traditional finance world is stronger than ever. New business models and technology tools have revealed the need for asset and transaction transparency, as well as increased trust in central exchanges.
1. U.S. banking giant acquires leading crypto centralized exchange, encouraging global adoption.
The first American banking giant will soon realize it is better to buy a crypto platform than build one because they will quickly obtain trading tools, order book, processes, and more importantly, an existing exchange customer base and their assets. This is likely to happen after the SEC releases regulations on exchanges. This will bring Wall Street credibility to the exchange industry, including compliance and risk analysis.
Other countries will continue to adopt cryptocurrency. El Salvador was the first country to approve Bitcoin (BTC) as a legal tender, giving $30 in BTC to every citizen via a provided wallet, funding a BTC mining operation using geothermal clean energy, and floating a national bond to buy more BTC for its treasury. Brazil is close to regulating crypto for trading and payments. The Central African Republic has adopted BTC as a legal tender. Russia is examining how to legalize international trade using cryptocurrency.
2. “On-chain” use cases increase dramatically, accelerating crypto onboarding with self-custody wallets.
Transparency is the key attribute to being on-chain, particularly due to recent crypto collapses, such as FTX and Celsius. These platforms are opaque, lacking public transparency and oversight, which allows irregular, unethical, and fraudulent activities to happen behind closed doors. Being “on-chain” refers to leveraging the blockchain for all transactions. It is also known as “blockchain native” which allows open auditing and accounting using public block explorers to prevent internal fraud. All fees, expenses, profits, and losses are permanently documented on-chain. A few on-chain use cases: onboarding customer/investor crypto assets into a crypto trading platform, executing all crypto transactions from public and identified custodial wallets, and executing crypto transactions in blockchain smart contracts.
Investor interest in allocating a portion of their net worth to crypto is increasing, despite the current market conditions. Institutional interest in allocating to crypto assets is also increasing, in correlation with regulatory environments. Self-custody wallet adoption is growing significantly due to custodial platform failures such as FTX and Celsius, where investors learned the hard way that self-custody matters. “Be your own bank” is the new mantra.
Software automation is critical to enable easy investor crypto onboarding. Yet many new crypto investors still find it challenging. We need additional platforms to come to market to facilitate this in a quick, simple, and safe way.
Our current period of crypto adoption is similar to the adoption of the Internet in the early 1990s. As PCs became prevalent, users added modems to connect to the Internet. Then ISPs emerged to simplify this process. Diversified crypto products will come to market in a similar way, such as crypto indexes (vs. individual token selection). Self-custody solutions need further improvements.
3. U.S. regulations escalate.
2023 may become crypto’s “then they fight you” phase. Recent crypto collapses and criminal activities clearly highlight the need for stronger regulation. This topic is being widely discussed not only by the SEC and CFTC, but in Congress, where many bills are being authored and distributed that could come to fruition this year. Counter to what many crypto advocates think, regulation can actually be good for crypto if it is done fairly and properly. Regulations will bring more institutions into crypto; today, many cannot have exposure to digital assets due to compliance issues.
Here are three common-sense regulations we can expect to happen: (1) regulate stablecoins; (2) regulate centralized exchanges based in U.S. jurisdictions; and (3) update the Howey test for whether a token is a security. Here is one non-viable regulation we can expect to end: regulating decentralized exchanges based in U.S. jurisdictions.
4. CBDCs Surge.
China has been deploying its digital yuan Central Bank Digital Currency (CBDC) for some time. Now over 100 other countries, representing roughly 95% of global GDP, are currently exploring a CBDC (compared to early 2020, when only 35 countries were considering a CBDC). Nearly all of the G20 countries are now in the advanced stages of CBDC development.
The U.S. is behind in developing a digital dollar CBDC, but it has publicly declared it is under development and coming to market. CBDCs will allow each government to have complete control over their digital currency: who can access it, how to spend it, and documentation of all transactions on their private proprietary blockchain. Due to the war in Ukraine and the sanctions imposed on Russia, some countries are now considering payment systems that avoid the U.S. dollar, which is the world's reserve currency. There are now ~15 cross-border CBDC trials, nearly double the number from 2021.
5. CEFI is down, DEFI is up.
All relevant centralized exchanges (CEXs) will be forced to document their “proof of reserves” due to the collapse of popular centralized platforms. All exchanges will be under pressure to assure their customers they do indeed hold the crypto assets purchased and stored on their platform. While showing proof of reserves is a significant first step towards transparency, the current method is not verifiable on-chain 24x7x365–it merely provides a snapshot of platform assets.
While CEX usage is facing an industry-wide trust issue, CEXs are still required to on-board many crypto investors. Meanwhile, decentralized exchange (DEX) usage is increasing dramatically. DEXs operate on Decentralized Finance (DeFi) methodologies, rather than legacy Traditional Finance (TradFi) methodologies. Fiat to crypto ramps are coming into the DeFi/DEX space. DeFi is gaining new momentum, so CEX won’t be the only game in town.
