Navigating the wild cryptocurrency market in 2023: What you need to know

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Ripple’s insights to navigate the cryptocurrency market in 2023

  • The failure of UST made the need for regulatory clarity and taxonomy for stablecoins more apparent.
  • In 2023, regulators will consider additional risks, such as consumer protection and retail investor safeguards, market integrity requirements, and business conduct requirements. 

The collapse of TerraUSD (UST) in 2022 had a significant impact on the cryptocurrency market, raising serious concerns about stablecoins’ reliability and highlighting the need for regulatory clarity. A broken peg caused the collapse of UST after a routine transfer between liquidity pools and an attempt to repair the peg by purchasing UST. However, the continued sell-off in UST drained those funds while hyperinflating UST’s sister token LUNA, eventually crashing the price of both UST and LUNA.

Tech Wire Asia recently had the opportunity to sit with Rahul Advani, APAC Policy Director at Ripple, to discuss the latest developments in the cryptocurrency market. Advani shed some light on the recent collapse of UST, which had a significant impact on the market, raising serious concerns about the reliability of stablecoins and highlighting the need for regulatory clarity.

The crash of UST raised several substantive issues – that some stablecoins may only be stable in name, the importance of collateralization and the quality of the collateral, and the need for efficient redemption mechanisms for stablecoins. It also unveiled the interconnectedness between entities in the crypto ecosystem, highlighting the potentially systemic nature of such stablecoins. Lastly, it also raised the importance of consumer protection measures.

Therefore, the collapse of UST underscores the need for a comprehensive and nuanced regulatory framework that treats different digital asset actors according to their risk profiles. It also highlights a fundamental lack of transparency in many parts of the crypto industry.

Advani believes that for the industry to restore trust and avoid similar incidents from happening in the future, appropriate regulations that offer clarity are necessary. Such regulations should encompass robust measures to protect consumers while acknowledging the risks presented by business-facing crypto companies.

The failure of UST on stablecoins

The failure of UST also made the need for regulatory clarity and taxonomy for stablecoins more apparent – not all stablecoins are the same, and hence will come with differing levels of reliability and risk.

Navigating the wild cryptocurrency market in 2023: What you need to know

Rahul Advani, APAC Policy Director at Ripple

“We’ve seen some regulators in the region start to address these concerns. Japan has passed legislation introducing a legal framework for stablecoins, focusing on consumer protection. We expect Japan’s Financial Services Agency (FSA) to publish regulations by mid-2023,” said Advani. “Similarly, the Monetary Authority of Singapore (MAS) recently concluded a consultation on a proposed regulatory approach for stablecoin-related activities. We expect further developments on a regulatory framework for stablecoins throughout 2023.”

At the global level, the Financial Stability Board (FSB) published a consultative report reviewing the FSB’s high-level recommendations on regulating global stablecoin arrangements. At the same time, the Bank for International Settlement (BIS) Innovation Hub plans to launch Project Pyxtrial, which will enable the systemic monitoring of stablecoins.

“We believe a clear and globally consistent taxonomy for stablecoins combined with a risk-sensitive regulatory framework supported by cross-border cooperation and information sharing across jurisdictions will help support an innovative and reliable stablecoin ecosystem,” he added.

The impact of the bankruptcy of UST on the cryptocurrency market

A broad range of jurisdictions worldwide are expected to finalize their digital assets regulatory frameworks at a swift pace. This is partly due to the industry’s high-profile events last year and partly due to the regulatory development cycle, many jurisdictions are currently undergoing. By the end of 2023, it is anticipated that most jurisdictions will have implemented comprehensive digital assets legislation.

“When digital assets markets became increasingly active around five years ago, regulators assessed money laundering and terrorist financing risks as the key areas of concern. However, with the rapid growth in scale and complexity of digital asset activities, other risks have surfaced – as we’ve seen with events like FTX and UST,” said Advani.

Advani expects that in 2023, regulators will consider additional risks, such as consumer protection and retail investor safeguards, market integrity requirements, and business conduct requirements. He emphasizes that a risk-based approach to regulating the sector will be crucial, as a “one-size-fits-all” approach will not be effective.

The regulation surrounding stablecoins, crypto and DeFi in 2023

“Regionally, we expect to see more focus on stablecoin regulation in 2023 in Japan, Singapore, and Hong Kong,” said Advani. “More broadly, we expect that Australia, New Zealand, and South Korea will provide some level of regulatory clarity for crypto in 2023; while Singapore and Hong Kong are expected to rethink their approaches to retail access to crypto; and India is expected to raise the issue of regulating the sector at the G20 as a part of their presidency.”

An emerging area of interest is also regulations around DeFi, spurred by the growing adoption of DeFi services among consumers in the region. A 2022 survey conducted by Visa and YouGov, which polled 16,295 adults across 14 markets, found that 21% of APAC consumers had used DeFi services before, a proportion that’s expected to grow 17% this year, with a further 38% of respondents expressing an interest in DeFi services in the next six months. However, in addition to security risks, the lack of regulations in DeFi services also generates concerns about consumer protection and anti-money laundering risks.

The MAS announced the launch of Project Guardian in 2022, which aims to test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity. We expect work on Project Guardian to continue into 2023, with the MAS developing acceptable governance models and technical standards to regulate DeFi.

Bridging the gap between the crypto and fiat worlds in the cryptocurrency market in 2023

The companies that can master the on-and off-ramps to crypto will have a significant competitive advantage in the future. This capability is one of the major hurdles in the utility of crypto today. Crypto companies that have dominated the headlines of late have been highly speculative, at times to the detriment of their customers.

In an uncertain economic climate, businesses will focus on enhancing their bottom-line growth by adopting cost-cutting measures. As a result, there will be an increased interest in leveraging blockchain and cryptocurrency technology to optimize business processes and boost efficiency, particularly in cross-border payments. Ripple will play a pivotal role in bridging this area’s gap between the crypto and fiat worlds.

Business-to-Business (B2B) cross-border transactions are expected to exceed US$42.7 trillion by 2026, up from US$34 trillion in 2022 – but the B2B payments landscape continues to be burdened by legacy financial infrastructure.

According to Advani, Ripple is well-positioned to address these pain points, helping businesses reduce their overhead and eliminate pre-funding. Macroeconomic pressures will likely propel more companies to capitalize on crypto-enabled payments and spur innovation in this space.

“Ripple’s genesis is in bridging the gap between crypto and fiat, so it isn’t new to us. We have always been focused on building around utility, and we believe that real crypto use cases will withstand the test of time. Through RippleNet, our flagship cross-border payments solution, we have processed millions of transactions worth billions of dollars,” he continued.

NFTs evolving in 2023 and impacting real-use cases

Ripple predicts that 2023 will be the year of the NFT as they increasingly unlock real-world use cases. As NFTs continue to gain mainstream acceptance, the company anticipates gaining a clearer understanding of their practical applications, such as in art collectibles or gaming. They also foresee real estate and carbon market NFTs gaining more popularity due to their potential to address real-world issues, such as improving operational efficiency and providing greater transparency in ownership confirmation.

Navigating the wild cryptocurrency market in 2023: What you need to know

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“At Ripple, we see the potential NFTs have in accelerating the creator economy and inspiring new business models. Last year, Ripple launched a US$250 million Creator Fund, to provide creators with the technical and financial support needed to develop NFTs,” said Advani.

Nonetheless, Ripple identifies other promising use cases for NFTs in the market. One area is the carbon market, which has long faced challenges related to transparency and traceability, particularly in pricing and market data. By leveraging NFT tokenization, Ripple believes that the legitimacy of carbon credits can be verified, driving a transition toward a greener economy and enabling sustainable value chains.