January 5, 2023

Crypto Winter: WEF Blames it on Regulators' Indecisiveness

Crypto Winter: WEF Blames it on Regulators' Indecisiveness
  • A recent World Economic Forum article highlighted how regulators had failed the crypto ecosystem, citing their inability to develop well-thought-out regulations. 
  • The report noted that despite the setbacks, cryptography and blockchains would continue playing a crucial role in the interconnected global financial ecosystem.
  • The most significant damage that back-to-back failures of major crypto projects in 2022 inflicted was the waning trust in crypto finance.

In preparation of its Annual Meeting in Davos later this month, WEF published an article that looks into what the future holds for cryprocurrencies, and whose responsibility is the current state of the industry. 

We are in 2023 now, but the after-effects of the past year's debacles, from the Terra/Luna crash and Three Arrows Capital (3AC) failure to the recent collapse of crypto exchange FTX, haven't been fully realized yet. 

These numerous setbacks have wiped out more than $2 trillion from the global crypto market cap, with the digital assets sector officially entering the bear phase, which according to the World Economic Forum (WEF), could be "more of an ice age" than just another crypto winter. 

According to the author of the WEF article, Dante Disparte, Head of Global Policy at USDC stablecoin issuer Circle, while millions of consumers lost money due to the failure of large crypto protocols, the more worrying part is the "waning" trust in the promise of crypto-finance.

Despite the setbacks, there are no doubts that "cryptography and blockchains will continue to be integral parts of the modern economic toolkit," the WEF article added. Countries that enable responsible competition in the crypto sector will likely shape the future. 

Disparte further pointed out how global regulators failed the crypto ecosystem, as all they have done so far is just talk about sensible regulations instead of forming one. Yet, they never missed a chance to sound an alarm about crypto's excessive risks. 

Crypto to Remain a "Protagonist"

Cryptocurrency regulation is a complex and evolving area with different jurisdictions having different approaches. 

Recently, India's central bank called for a global crypto framework while mentioning that FTX and Terra crash highlight "inherent vulnerabilities" in the crypto ecosystem. 

India's apex bank recommended three options, viz: "same-risk-same-regulatory-outcome" approach, outright ban of crypto, stablecoins, and DeFi, and let the sector implode and become systemically irrelevant.

The US SEC has also been intending to boost crypto exchange enforcement as well as increase its scrutiny of virtual asset service providers. The agency has further called on companies to fully disclose crypto risks, citing "financial distress." 

A string of Failures: Is it a Death Knell?

The crypto industry setbacks emboldened the crypto critics, who are now blaming all major global problems on the rise of cryptocurrencies. 

On top of that, the bear market has forced many crypto businesses to close their doors while others have been imploding. 

All these has led to a lot of negative press for the industry, and many people are now questioning whether or not it is a viable investment.

Yet, the article argues, history is riddled with examples of otherwise good technologies being co-opted by bad actors and those ever-present human follies of greed, which are amplified in lightly regulated sectors.

We could now see the handover of crypto technology and blockchain infrastructure to more regulated and established institutions, much like how the dot-com bubble bursting saw the handover of the future of the internet to more durable companies.

“Indeed, as a test of the staying power of digital assets and blockchains at the core of financial services (and other areas of the global economy), watch what the big banks and mature financial services firms do, not what they say,” points out Disparte. 

The adoption of crypto technology is inevitable, and "for all its faults, this technology remains a protagonist in the global financial world." 

The way to create a safer crypto industry, as the article concludes, is punishing errants at speed, “giving bad actors few places to hide.”


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