Cryptocurrencies have had a rough year. FTX’s Sam Bankman-Fried was put under house arrest over allegations of embezzlement. Meanwhile, Celsius Network, a crypto lender, filed for bankruptcy after getting caught up in a fraud investigation, among other problems. And that’s not the end of the troubles plaguing one-time stars in the crypto world.
As these companies fell from grace, so did crypto values. As The Economist reports, the market value of all cryptocurrencies went from $250 billion in early 2020 to $3 trillion by late 2021 before falling back to $1.3 trillion. Plagued by crashes and scandals, the crypto trend came to a screeching halt — at least for mainstream investors. But even as public trust has waned, some still see a future for cryptocurrencies.
The cryptocurrency promise
For some, cryptocurrency may seem to have come out of nowhere — but like most innovations, it arose from a perceived need. Based on blockchain technology, cryptocurrencies essentially eliminate the need for centralized banks, creating — at least theoretically — a safe, decentralized currency removed from government control and monitoring. While that may seem unnecessary — even unwise — to some, crypto has come in handy in a variety of ways. For instance, the Council on Foreign Relations reports, “Dissidents in authoritarian countries have raised funds in Bitcoin to circumvent state controls, including to avoid U.S. sanctions on Russia.”
Cryptocurrency has also been popular in places with unstable currency, poor financial infrastructure, or other economic challenges. In other words, it’s a valid choice where the other options are worse. However, when those places start to develop their infrastructure, the popularity of cryptocurrency declines quickly.
The real win is not so much for crypto itself as for the blockchain. This technology that underlies crypto has become more familiar alongside crypto’s rise, allowing it to start popping up in other areas. For instance, Web3 gaming came out of the crypto and blockchain explosion — and according to some, will be better off for crypto’s crash.
As The Economist predicts, blockchain will just continue to improve, paving the way for the future of the internet — but ironically, it may not have a chance without more regulation.
To regulate or not?
The crypto craze may have quieted down in the wake of its scandals, but it has not gone away entirely. To many, it would seem that the experiment has failed. Unregulated financial markets have a way of running amok, and crypto has proved to be no different. Its decentralized nature has made it ripe for bad actors to come in and take advantage of the lack of oversight. So, it’s no wonder crypto has been banned in many countries across the world — though enforcing such a ban is not straightforward in a completely decentralized and unregulated market. Meanwhile, other countries are still trying to figure out how to rein in crypto while reaping its potential benefits.
In search of a definition
In the United States, part of the problem with regulating cryptocurrency is figuring out how to classify it. Is it a security, a commodity, a currency, or a fourth option yet to be defined? At the moment, crypto looks and acts most like a Security, which, as defined by the Howey test, requires money to be invested with an expectation of earning profit through the efforts of others and be a common enterprise.
And there is little political consensus on the line to be taken. Even as the Security Exchange Commission (SEC) and other regulators try to control this unregulated Wild West of financial markets, U.S. Republicans in the House Financial Services Committee complain about regulation driving exchanges overseas. That outcome seems predictable considering that crypto emerged as an alternative to government-regulated financial systems and exchanges aren’t likely to wait around for regulation.
At their own risk
In the U.K., officials have a different view of cryptocurrency, and are looking to regulate it as a form of gambling. According to The Guardian, a report from MPs said, “The government must avoid wasting more taxpayer funds promoting tech innovations such as digital tokens, without demonstrating the clear benefits to the public.”
Officials say that investing in crypto can be addictive, but, like others, see value in the underlying technology: “And while the underlying blockchain technology could benefit the wider financial services industry, the process of betting on the volatile price of unbacked assets such as bitcoin could lead consumers to lose life-changing sums of cash.”
An uncertain future
Even as these discussions continue, legal cases may decide the future of crypto before regulators have a chance. In June, the SEC filed a lawsuit against cryptocurrency exchange Binance in federal court. As The Intelligencer put it, “The bigger picture, though, is that the SEC complaint marks another major negative moment for crypto after more than a year rife with such brutal milestones. Many of the industry’s once-brightest stars are in jail or being sued.”
The unregulated nature of cryptocurrency may have been its raison d'être, but, increasingly, could also ultimately be its demise. While it is unlikely to find a role in the portfolios of mainstream investors, it remains to be seen whether the technology that underlies the industry will go on to bigger and better things.