This year has been a tumultuous year for the technology industry. The technology industry, as a whole, has been on a de-risking mode since the US Federal Reserve hinted at multiple rate hikes in late 2021 to combat rising inflation and with the Nasdaq Composite falling as low as 33 per cent in June 2022 from the start of the year. The crypto industry was not spared, shedding US$2 trillion in market capitalisation and entering into another “crypto winter” since the launch of Bitcoin 13 years ago.

THE CONTAGION

 What has been different about this crypto winter, other than its strong correlation with price movements of traditional asset classes like tech stocks, is the contagion risk triggered by the collapse of the Terra LUNA “stablecoin” ecosystem. The crash of cryptocurrencies’ prices like Bitcoin and Ether was exacerbated by the Terra LUNA incident, causing a ripple wave of insolvencies and retrenchments in major crypto companies.

Crypto lenders like Celcius Network, Vauld, Babel Finance and Hodlnaut have halted customer withdrawals. Hedge fund Three Arrows Capital is in liquidation. The Monetary Authority of Singapore even rescinded its in-principle approval for Hodlnaut’s prized digital payment token license under the Payment Services Act,

Meanwhile Coinbase, Crypto.com, OpenSea, Blockchain.com and Gemini are among firms forced to make significant job cuts.

REGULATORY IMPLICATION

The writing is on the wall from the perspective of crypto regulation for it will only get more stringent and expanded in scope. During the early days of crypto regulation under the Payment Services Act, the focus has been on illicit financing and technology risk, as the transaction volume of cryptocurrencies were and still are miniscule when compared to other asset classes.

Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), acknowledged during a media conference on July 19, 2022 that the focus of crypto regulation here so far, as well as in most major jurisdictions, has been on containing money laundering and terrorist financing risks, and that they do not cover areas such as consumer protection, market conduct, and reserve backing for stablecoins. He further remarked that MAS is looking to broaden the scope of regulation to cover more activities in the crypto space,

Way before the Terra LUNA meltdown, MAS had acted in January 2022 to restrict advertising and marketing the purchase of cryptocurrencies to the general public. Its view was that due to their price volatility, cryptocurrencies are not good investment vehicles for retail investors, and most advertisements tend to trivialise the risks involved.

Senior Minister and Minister-In-Charge of MAS, Tharman Shanmugaratnam, in a written response to a Parliamentary question on Aug 1, 2022, announced that MAS is working on reviewing its approach to digital assets regulations and the review will significantly target stablecoins.

Regulation is necessary to prevent similar breakdowns, but overly restrictive rules can kill innovation and growth altogether. Even then, additional targeted regulation could be beneficial to steer the industry towards responsible innovation. It is clear that guardrails are necessary so that crypto players would be deterred from taking on unreasonable amounts of risk.

“Targeted regulation could be beneficial to steer the industry towards responsible innovation. It is clear that guardrails are necessary so that crypto players would be deterred from taking on unreasonable amounts of risk,” said Mr Tharman Shanmugaratnam.

IS DECENTRALISATION DEAD?

Not surprisingly, crypto critics have come out in droves to attack the crypto industry as a whole, riding on the negativity generated by the Terra LUNA collapse and the contagion it triggered. So is decentralisation, the core basis of crypto, dead?

Evidence on the ground suggests not.

First, the previous crypto bull had been partly driven by institutional adoption and that continues to be a key driver for its recovery. For example, crypto brokerage Coinbase just announced a  partnership with Wall Street giant BlackRock,which had about US$10 trillion in assets under management in 2021, that will allow BlackRock's institutional investors to trade Bitcoin through the platform's Coinbase Prime service.

Second, big brands are also coming into the space, most recently luxury jewelry brand Tiffany & Co is teaming up with CryptoPunks – one of the most popular and expensive NFT projects – to release a limited NFT collection called "NFTiff".

NFTiff is redeemable for a custom-made piece of physical jewelry based on your CryptoPunk NFT. Other big brands that entered the Web3 space over the last few months include Nike’s NFT “Cryptokicks” sneakers and Nickelodeon’s first-ever NFT collection “Rugrats and Hey Arnold!”.

Third, investors are still investing in Web3 projects, despite the winter. In late May, venture capital firm Andreessen Horowitz raised US$4.5 billion, with US$1.5 billion allocated to bet on the future of Web3 startups. One month later, Binance Labs, the venture capital and incubation arm of Binance, announced the closing of a new US$500 million investment fund to invest in projects that can extend the use cases of cryptocurrencies and drive the adoption of Web3 and blockchain technologies. More recently in mid-July, Animoca Brands, the company advancing digital property rights for gaming and the open metaverse, announced that it has completed a capital raise of US$75 million at US$5.9 billion valuation.

Last but not least, cryptocurrency is just a small sliver of the blockchain ecosystem. As MAS’ Menon recently commented: “We are actively promoting the digital asset economy, where we can use these technologies to solve real problems like cross-border settlement, cross-border trade finance, more efficient capital, market activities, trading and so on.”.

CONCLUSION

Bitcoin has been declared dead more than 400 times since its birth 13 years ago, but it has always rebounded and on even higher grounds.

The crypto industry is primed for a strong and eventual recovery, driven by increasing institutional adoption, heightening of involvement of big brands and rising interests of investors. But expect the journey to be peppered with more stringent and expanded regulations.

I believe that the industry will learn valuable lessons from the current winter, engage in responsible innovation and emerge stronger. Only then can it gain the trust and confidence of regulators and policy makers and partake in shaping a pro-innovation regulatory and policy environment.

Chua Hock Lai is co-chairman of the Blockchain Association Singapore and former Founding President of the Singapore Fintech Association.