Crypto is dead, long live crypto?

The 2022 collapse of FTX, the world’s second-largest cryptocurrency trading platform, once valued at $40 billion, looked to have taken what gloss there was on crypto, well and truly off.

But did it? Bitcoin, the best-known cryptocurrency, crashed in the wake of the crisis from about €56,000 to €15,000, but has since climbed back, to €43,000, so many still see value in it.

“The events of 2022, running into 2023, certainly led to increased urgency among legislators and regulators, who are asking themselves the question — ‘how do we protect investors?’”, says Maria Flannery, financial services audit partner and head of digital assets at KPMG.

While many believed 2022 was “the nail in the coffin for crypto”, in January of this year the US Securities and Exchange Commission, “considered by many to be one of the most crypto-hostile regulators”, approved the first US-listed exchange-traded funds (ETFs) to track Bitcoin, she says.

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“The launch of Bitcoin ETFs was a real watershed moment for the crypto world because it’s the first time that investors can gain direct exposure to Bitcoin through a regulated product,” says Flannery.

“It’s worth noting that these are really big players involved — asset managers such as BlackRock, Invesco and Fidelity among others — so this lends a level of legitimacy to the asset class, which will help to alleviate some of the association risk it bears with its links to the dark web.”

The question now is whether crypto is likely to be regulated out of existence, overtaken by central bank digital currencies (CBDCs) or both.

“The regulatory evolution will be interesting. As opposed to stifling growth, increased regulation would likely grow the market, providing stability and helping investor confidence,” says Flannery.

That investor confidence piece is key. “For crypto to succeed, it needs wider market adoption and this requires investors to have confidence in the asset class. The launch of the Bitcoin ETFs is likely to attract more institutional investors, which could potentially boost market capitalisation and liquidity,” she adds.

“The launch of CBDCs would be expected to come with a set of regulations and potentially new tax legislation, and the state-backing of a digital currency would attract a different type of market participant,” she notes.

“CBDCs may be preferred for everyday transactions by participants who value stability and the security of central bank backing, whereas cryptocurrencies would continue to appeal to those valuing privacy, decentralisation and the concept of the asset as a store of value. The differentiation would likely see us ultimately ending up with two coexisting crypto worlds — the regulated and the unregulated.”