We saw the fall of the Terra network in May, the high-profile collapse of crypto exchange FTX, and many companies left with little choice but to reduce their workforces. It would be easy to assume that the downturn affected all industry participants equally but this wasn't the case. While many companies suffered, those focused on developing crypto solutions for real problems continued to grow. At the same time, regulation continued to dominate the agenda, a trend that is unlikely to change in the near term. 2023 will be vital in restoring trust in crypto and encouraging innovation and growth.

Sendi Young, Managing Director of Ripple, predicts what to expect from the industry in the year ahead.

Market setbacks fail to put the brakes on institutional adoption of crypto

Despite the market downturn, institutional adoption of blockchain and digital assets will accelerate as corporations launch pilots and continue to investigate the technology. Banks are no longer questioning whether they require a crypto strategy but are instead asking themselves what their crypto strategy should be. There is a recognition from traditional financial institutions that the technology is here to stay, creating opportunities to bring greater efficiencies, transparency and speed to existing financial infrastructure.

While many legacy financial services companies continue to exercise caution around incorporating digital assets across their businesses, particularly in light of recent market turmoil. A significant number of traditional finance and payments institutions such as Barclays, Goldman Sachs, JP Morgan, Mastercard, Morgan Stanley, SBI Holdings and Visa are already pursuing blockchain-related projects ranging from cryptocurrency custody and trading, to data processing, to payments and trade execution. The investment horizon of banks and other large financial institutions is measured not in days and weeks, but in years, so we see the embrace of digital assets and blockchain continuing throughout 2023 and beyond.

Increasing consolidation as the market matures

2023 will see increased consolidation in the industry as healthier companies look to acquire those that are struggling to plug gaps in their own capabilities following the collapse of FTX, as well as casualties from earlier in 2022 like Celsius, Voyager and Three Arrows Capital. Valuations across the industry have declined significantly since the highs of late 2021 and early 2022, creating appealing opportunities to acquire capabilities and expertise that would otherwise require significant time and resources to build in-house. We will also see an increasing trend for crypto/blockchain firms to be acquired by traditional financial services players, as well as established companies from other sectors. 

Europe emerges as a leader in the drive towards sustainable crypto

The sustainability credentials of crypto and blockchain will continue to be scrutinised, driven by pressure from consumers and policymakers. This trend will be particularly pronounced in Europe where the shift toward a green economy is a significant economic and political aspiration. The drive towards greater sustainability will manifest both in projects gravitating towards less energy-intensive blockchains and an increased focus on providing blockchain-enabled solutions to the challenges we face as a society, for instance through the tokenisation of carbon credits and the establishing of sustainable value chains.

Central Bank Digital Currencies come of age

A number of non-eurozone nations in Europe will announce their intentions to pilot a Central Bank Digital Currency (CBDC). Several non-European nations have already publicly committed to launching CBDC pilots, with India and Brazil amongst the most notable, however European nations are also realising the benefits that a CBDC can bring. These include the preservation of the local central bank's role and the ability to boost financial inclusion. What’s more, the collapse of FTX has further highlighted the need for nations to have in place a dependable, risk-free digital settlement asset as a more secure alternative to other crypto solutions.

New stablecoins created as adoption resumes

During 2020 and 2021, $165 billion entered the crypto market via stablecoin creation. Thanks to the collapse of Terra, 2022 proved to be difficult year for stablecoins, however, this forced the market to differentiate between fiat-backed stablecoins and algorithmic stablecoins, and drove value towards more transparently managed stablecoins, such as USDC whose market cap is currently above the level it was at in late 2021. We’ve also seen new fiat-backed stablecoins issued, such as EURS in Europe and AUDC in Australia.

Given market volatility, and the loss of confidence in tokens such as FTT created by the collapse of FTX, 2023 will witness a greater adoption of fiat-backed stablecoins as institutions look to realise the benefits of blockchain technology such as real-time merchant settlement. The creation of new non-USD fiat currencies will also drive this trend.

Crypto regulation finally arrives in the UK and Europe

After the UK’s Financial Services and Markets Bill comes into force, regulators will use these powers to develop an actionable crypto regime to put the UK in good standing to support the development of its cryptoasset sector. Meanwhile, in the EU, Markets in Crypto-Assets (MiCA) will finally be passed by the European Parliament in February. While it won’t come into force until 2024, as soon as MiCA is ratified, the ‘Level 2’ European Supervisory Agencies will immediately start developing detailed rules and standards to make the law work in practice. 

All of the above leads us to believe that 2023 will be another exciting year for the industry, as real utility is prioritised and new use cases emerge. Significant developments across a range of areas will see the industry evolve and move forwards – building trust and driving growth. By this time next year, we will have seen measurable change in the industry which will have made further progress towards realising the opportunities that crypto presents.