This has been a tumultuous year for cryptocurrency, topped off in spectacular fashion by the rapid demise of FTX.
But when the dust settles, what will the crypto sector look like in 2023?
It’s fair to say that, in a market loaded with uncertainty and risk, one thing we can be sure of is ‘buyer beware’ will remain the order of the day.
The US Securities & Exchange Commission has charged FTX founder Samuel Bankman-Fried with “orchestrating a scheme to defraud equity investors in FTX Trading Ltd (FTX), the crypto trading platform. Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.”
Gary Gensler, chair of the SEC, said: “We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto.
“The alleged fraud committed by Mr Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws… To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”
Laith Khalaf, head of investment analysis at AJ Bell, commented: “Crypto buyers should be willing to accept a total wipeout on their investment as a result of the highly speculative nature of digital coins, but it should not be because the exchange they used to make the purchase goes bust, taking their cash with it.
“That’s what many FTX customers are confronting.”
Mr Khalaf says the vast inflow of money into crypto has not been matched by appropriate levels of regulation: “Investors should be wary about handing over large sums to companies they know little about, and which are not supervised by a robust regulator.”
He believes that, in the short term, crypto buyers are likely to become more discerning about who they use to buy and sell coins – a positive development to come out of the FTX scandal.
As for 2023, Mr Khalaf believes there could also be a move by the crypto industry to embrace more regulation in order to attract and retain customers: “Greater regulation will also entail higher costs and more risk warnings, making crypto compete on a more level footing with existing financial assets sold through regulated exchanges.
“The FTX scandal is clearly a punch on the nose for the crypto industry, but it’s unlikely to be a knockout blow. The crypto community is sizeable, and neither demand nor supply is going to disappear overnight.”
Incoming head of the Financial Conduct Authority, Ashley Alder, told MPs last week that further regulation of the crypto market is needed, with exchanges his main point of concern: “They should be regulated further. The point is this: when it comes to crypto assets, as distinct from the underlying blockchain, our experience to date of platforms, whether FTX or others, is that they are deliberately evasive. They are a method by which money laundering happens at size.”
Mr Alder will be chair of the FCA from 20 February 2023.
Andy Renshaw of anti-fraud specialist Feedzai says the FTX saga could bring benefits to the wider crypto sector: “Following the downfall of FTX, it’s fair to say the crypto winter is here, and if there’s a silver lining for the year ahead, it is that there will be a drop in cryptocurrency scams as investors move away from ‘fear of missing out’ decisions to take a harder look at the market.
“But, while crypto’s risk has been fully exposed, it’s still likely to attract potential investors and consumers should exercise caution and ask hard questions when making these types of investments.”
Mr Renshaw also warns that any decline in the rich pickings available from the crypto market will push fraudsters into other areas: “There are plenty of other investment scams to push. Using their familiar high-pressure tactics, fraudsters will likely try to lure investors into fake stock, gold, or other commodity-related scams.
“For banks, the advances in fraud techniques we have seen already, and the fact that fraudsters are constantly changing their tactics to stay ahead of anti-fraud and money-laundering measures, should serve as a wake-up call that identity solutions alone aren’t enough to stop scams.
“By pressuring or manipulating their targets, scammers have found a way to bypass safeguards like two-factor authentication and even biometrics.
“But the heightened threat of scams also presents opportunities for banks. Liability is shifting for financial institutions to cover losses to scams. If banks proactively offer to protect their customers, they can offer an attractive market differentiator.”
Mr Khalaf at A J Bell says 2023 will see continued turmoil in the crypto arena: “This time next year, Bitcoin could be trading at $5,000 or $50,000 and neither would be a total shock, seeing as the market is almost exclusively driven by sentiment. Looking further out, the longer term adoption of crypto by consumers, businesses and investors is deeply uncertain, and that makes the underlying assets highly speculative.
“That’s especially the case seeing as many central banks have either launched, or are considering launching their own digital currencies, which could usurp many of the beneficial functions of crypto.
“Whatever the long term prospects for crypto may be, the journey is going to be one of lurching from feast to famine. 2022 has definitely fallen into the latter camp, with the FTX scandal deepening the crypto rout prompted by a sell-off in speculative assets.
“If 2023 is to mark a turn in sentiment, the crypto market is going to have to climb a sizeable wall of worry.”
