Blockchain technology has enabled a digital asset ecosystem that can change how we live, work, play and interact on a global scale. While the digital assets market unfortunately experienced high-profile collapses lately, it is essential to distinguish volatile price action, process failures and fraud by bad actors from the robust foundation. The underlying distributed ledger technology (DLT) has immense potential to propel the modern innovation of finance.
Considering the promising advancements of blockchain networks and their diverse applications and projects, here are my top three predictions to look out for in 2023:
- There will be a more overt distinction between investing in blockchain technology infrastructure, cryptocurrencies and Web3.
Currently, cryptocurrency is the most well-known application of blockchains, but the technology’s capabilities transcend digital currencies. Blockchain technology has evolved from early roots in a single blockchain network and cryptocurrency to a diverse, ever-expanding digital assets universe. The technology gave rise to dozens of major blockchains now driving the industry (nearly 1,000 more exist), over 13,000 tokens with diverse utilities and functions, decentralized finance (DeFi), more than 4,000 decentralized applications (dApps), the exploration of Web3 and burgeoning metaverses. As more people broaden their understanding of distinct ecosystem components, there will be a clearer delineation between assets that exist purely as a medium of exchange (e.g., Bitcoin) and those that aim to leverage blockchain as a technology for real-world use cases (e.g., infrastructure, smart contracts and tokenized physical assets). This knowledge will attract token issuers like corporations and municipalities, which will usher in investment bankers, broker/dealers and investors.
- While the size of the market shrinks during the “crypto winter,” we will continue to see announcements of traditional financial services companies with plans to enter the blockchain ecosystem.
Since the advent of blockchain, much has changed, but the technology’s fundamental tenets of decentralization, transparency and immutability remain constant. Those who recognize the long-term value proposition will expand their blockchain footprint in the new year. The global spend on blockchain solutions is expected to reach $19 billion in 2024, up from $11.7 billion in 2022. Further, according to Bitstamp’s Crypto Pulse survey, 80% of institutional investors believe crypto will overtake traditional investment vehicles within a decade. Some institutions are ahead of the curve—for example, BNY Mellon announced plans for the industry’s first multiasset platform that bridges digital and traditional asset custody. More institutions that are “long blockchain” will spend the “winter” gathering deep insights about the technology, identifying how it can improve existing processes, exploring opportunities for innovation and building for an inevitable blockchain-powered future.
- We will see increased regulatory clarity in the U.S., ultimately paving the way for increased corporate issuance, blockchain adoption and capital allocation.
Though political narratives differ, there is a bipartisan acknowledgment that the industry needs a clear regulatory framework. Calls for regulation have been amplifying and are at a fever pitch following the FTX collapse. The need to safeguard consumers and hold bad actors accountable is more prominent than ever. Among institutions, the current “regulation by enforcement” environment has merely created a holding pattern to avoid losses or surprise subpoenas for breaking unclear rules (consider the cases of Ripple and Oooki DAO). Clear and consistent regulation is an essential missing piece of the ecosystem puzzle and will be a major catalyst for growth once solved.
The crypto winter presents an opportunity to return to the founding principles of blockchain. Institutions will reflect on learnings from the past year and consider the long game—how the core tenets of the technology can transform their business and investment processes. They will analyze and integrate innovative blockchain solutions to mitigate existing challenges, improve efficiency and transparency, and democratize financial services.
Peter Hans is managing director of IR and business development at Arca Investment Management.