In a challenging year for cryptocurrencies, will the last quarter bring any light at the end of the tunnel?

Bitcoin and Ethereum prices are down by over 50% from their peak in late 2021. In May, a crypto crash wiped €300 billion off the market in one week, prompting fears of a full-scale global financial crisis and renewed calls for effective regulation from crypto providers, investors and analysts alike.

Despite some recovery in July, the size of the digital asset market had plummeted from its November 2021 high of $3 trillion to just $1 trillion today. As digital assets continue their advance into the mainstream, the race for effective regulation of cryptocurrency is accelerating.

In the US, June saw the introduction of a bipartisan bill focused on providing a clear regulatory framework. The ‘Responsible Financial Innovation Act’  bill will elevate the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) in their roles overseeing the crypto market. Although it will take time to pass the bill, in recent weeks, both agencies have, alongside other regulators, taken decisive action against fraudulent crypto operations in recent weeks.

In early August, the SEC charged 11 people in connection with Forsage, a platform that raised over $300 million from retail investors by offering them what appeared to be an easy way to make crypto-focused transactions.  The SEC alleges that given the primary method for investors to make money was by recruiting others into the scheme, Forsage operated as a “textbook pyramid and Ponzi scheme”.

The US Treasury also sanctioned Tornado Cash, which it says helped to launder more than $7bn of illicit funds and has links to Lazarus Group, a state-sponsored North Korean cybercriminal group. On August 12, the Dutch financial authorities arrested a 29-year-old suspected of helping to develop Tornado, one of the so-called ‘cyber mixing’ services that can make it harder for regulators to track payment trails across digital ledgers.

Meanwhile, cyber-attacks exposing some platforms’ weaknesses have further rocked the crypto market. In the first week of August, Hackers drained over $5.2m from around 8,000 digital wallets connected to the Solana blockchain and almost $200m from crypto startup Nomad, a so-called crypto ‘bridge’ that allows users to transfer tokens from one blockchain to another.

However, despite the ongoing market uncertainty, fraudulent players and high-profile regulatory interventions, cryptocurrencies are achieving broader acceptance by leading asset managers, and according to investor Timur Tillyaev, they have become “an established feature of the global financial landscape.”

A clutch of recent announcements shows some asset managers beginning to offer carefully-structured access to crypto investments in response to interest from institutional clients. “Large asset managers are starting to consider this a real investment,” said Chris Brendler, a senior research analyst at DA Davidson. “I think it’s a major data point in terms of traditional asset management companies embracing what for years has almost been ridiculed”, he added.

BlackRock, one of the largest asset managers in the world, announced a deal with Coinbase  in August, that will, among other things, allow the 82,000 investment professionals using its Aladdin platform to offer Bitcoin access to their clients. Charles Schwab, the US broker and investments group, also launched a new fund that will provide investors exposure to crypto without actually buying the currencies. “We know they are a speculative investment, but we have identified it as a long-term trend”, said David Botset, head of equity product management.

UK asset manager Abrdn has invested in regulated UK digital assets exchange Archax, which will give it a seat on the board and offer its institutional clients the ability to trade cryptocurrencies and other more esoteric assets on the exchange. “Our view is that the next disruptive event will be the transfer from electronic trading to digital exchanges and trading through digital securities,” said Russell Barlow, global head of alternatives at Abrdn, told the Financial Times.

Beyond the investment world, cryptocurrency is spreading in the fintech and corporate sectors. PayPal and Square facilitate crypto transactions on their platforms, while in the US, moviegoers can now use cryptocurrency to book tickets online with movie theatre chain AMC. Amazon too recently sparked rumours that it would soon embrace cryptocurrency when it advertised a role for a ‘digital currency and blockchain product lead’ – a move welcomed by industry players such as Ben Weiss, CEO and co-founder of CoinFlip, speaking to Time Magazine, said Amazon’s endorsement “could create a chain reaction of others accepting it…[it would]…add a lot of credibility.”

At a recent event on ‘The future of crypto regulation’ Rostin Behnam, Chairman of the CFTC, announced a restructuring that will create an Office of Technology Innovation reporting directly to him. Acknowledging that cryptocurrencies are now an established part of the financial landscape, Behnam commented: “We are past the incubator stage, and digital assets and decentralized financial technologies have outgrown their sandboxes.”

One of the reasons for the CFTC move, and the increasing momentum backing the regulation of cryptocurrency, is the high level of participation by retail investors. With one in five Americans reporting that they have traded cryptocurrency, Behnam says, “You’re going to have more vulnerable investors… It’s incumbent on us to educate, to inform, to disclose risks involved.” This point was underscored by the Federal Trade Commission when it reported that since the start of 2021, more than 46,000 American consumers had lost money to crypto scams, with a median loss of $2,600 and a total of over $1 billion.

As a year of turmoil draws to a close, international crypto investor Timur Tillyaev welcomes the increasing recognition that cryptocurrencies are here to stay and the acceleration of moves to regulate the sector. Writing in Finance Monthly, Tillyaev said “suppressing cryptocurrency now would only drive the market underground or into jurisdictions where its negative uses would thrive. Instead, there should be effective, global regulation implemented to take full advantage of the benefits of this emerging technology.”

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