What happened this week in the Crypto markets?
Written by Rayne Steinberg, CEO of Arca
I am filling in for our Chief Investment Officer, Jeff Dorman, this week. In my seat as CEO, I spend a lot less time focused on the markets and most of the time focused on interacting with our clients, partners, and other participants in the blockchain ecosystem. I want to share what I’ve learned from these conversations and provide some perspective. As you are all aware, this has been an incredibly challenging time for our industry, but there may be signs that this period is coming to an end and that we’ll finally see the green shoots of spring.
How Winter Came
It may be helpful to take a minute to revisit our descent into “crypto winter”. I know this is painful, but taking a pause to look back can be really helpful and constructive. First, it is important to realize that the crypto market was not alone in how bad 2022 was for risk assets and we can pinpoint the true start of the crypto winter to when the Fed raised rates in May 2022.
Source: Fund Monitors
This resulted in a steep correction in risk assets, and crypto being the riskiest of assets, had the steepest of corrections. This event was followed by a string of high-publicity failures in digital assets.
This included the collapse of TerraUSD and the subsequent failure of Luna. This served as the catalyst of a string of high-profile bankruptcies, including Celsius, Three Arrows Capital, and Voyager. All of these culminated in the fraud of Sam Bandkman-Fried and the collapse of FTX.
Not unsurprisingly, all of these unwinds happened at once. When the Fed turned off the “free money machine”, money started flowing out of crypto. This situation brings to mind the famous Warren Buffet quote: “Only when the tide goes out do you learn who has been swimming naked.” The only problem with crypto was that it appeared we were at a nude beach- but just didn't know it.
The FTX collapse was different than any previous failure because it involved outright fraud. This sent a chilling effect through the ecosystem that did not just stop investment into the space, but a suspension of service providers and almost all activity from the traditional world. Or so it seemed.
Through the entire “collapse”, traditional firms continued to work on their blockchain offerings- they just did so quietly.
Here is a sampling of the projects that were being worked on in the digital securities space:
Even after the collapse of FTX, traditional financial companies forged ahead. But yet again, another chilling effect occurred: the perceived hostility of the U.S. regulatory environment increased. The SEC brought several high-profile regulatory actions against crypto companies and the narrative that the U.S. was not open for crypto business began to take hold. This feeling would manifest itself in calls with institutional allocators who wondered how digital assets would survive in the U.S. Many digital asset companies started to pivot from the U.S. to other jurisdictions.
And then, everything changed. Blackrock filed for a Bitcoin ETF. The most amazing part of this filing is that it completely changed the perception of the space, but very little changed in reality. Blackrock did not receive an exemption and has, in fact, had to refile their application. But now, it is widely interpreted that digital assets are not going to be regulated out of existence, but instead just be regulated. This was likely going to be the outcome all along.
But to be regulated, you need to follow rules, and this has been a challenge for participants from digital assets. What we are seeing now is that a premium is being placed on those who have followed the rules and continue to do so. Traditional financial service players, whether they are asset managers, investors, or fiduciaries, are trying to work with teams and partners of the highest quality.
This is great news for those doing it right who have not only bathing suits but suspenders and belts.
Spring Arrives
This burgeoning of blockchain technology within traditional financial service companies symbolizes the emergence of the first green shoots of spring following a long winter. Just as challenges like the FTX fraud have cast frosty shadows, emphasizing the pitfalls and summoning greater regulatory vigilance, these harsh conditions have not dissuaded these institutions from tilling the fertile ground of this transformative technology.
As financial titans like BlackRock sow the seeds of blockchain into their offerings, we can anticipate a quickening in the growth of blockchain adoption. This unfolding trend highlights the urgency of a sturdy regulatory trellis, one that balances the innovation of blockchain with the necessary support structure for investor protection and market stability.
Despite the deep and harsh winter, the increased institutional adoption of blockchain technology heralds the arrival of a vibrant spring in traditional financial services. It offers an unprecedented bloom of transparency, efficiency, and security. The inevitable transformation stands to rejuvenate the landscape of the industry for the better, initiating a new epoch of financial services that can nurture a greater sense of trust, inclusivity, and resilience.
