2023 seems to be off to a good start for the digital asset space.
Instability in various crypto projects seems to have been resolved, at least temporarily, and it's been a few weeks since the last disastrous headlines.
Asset prices rise, crypto miners They are reportedly ready to restart their platforms and retail speculators they are once again avidly eyeing the markets.
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Regulatory frameworks are yet to come
Despite the recent optimism and enthusiasm from the crypto market, we must not so quickly forget about the challenges of 2022.
For one thing, many of the crypto markets' structural difficulties remain, according to ZK Zheng, chief executive of ZX Squared, a cryptocurrency hedge fund.
โ2023 continues to be a challenge for investors, especially during the first half of the year when the [Federal Reserve] it remains aggressive, raising interest rates to control inflation,โ Zheng said. โThe current crypto bear market cycle may end when the Federal Reserve stops raising interest rates (hopefully by the second half of the year) and any remaining leverage in the crypto market is removed. This includes debt loans related to certain major market participants (investment firms, distressed assets, mining companies, etc.).โ
Several of last year's notable developments will help set the course for this year, not just the failures of FTX Y Capital of the three arrowsbut also the ongoing work to create a regulatory framework for digital assets in the financial industry undertaken by government agencies.
Read more: Crypto Speculation Has Had Its 'Remuneration': Raghuram Rajan
With some of the most spectacular crashes in the digital asset space in 2022, combined with the growing links between cryptocurrencies and the traditional financial system, 2023 is a year in which regulators will need to play a more central role, according to Zheng.
โA crypto regulatory framework needs to be further established and clarified for a new crypto bull market to come,โ Zheng said. โIt is absolutely imperative to have regulatory audits and transparency to ensure stablecoins are fully collateralized and centralized exchanges (CEXs) are well capitalized to avoid repeats of the same.โ [Terra] and FTX failures. This may also include a measure on how to manage counterparty credit risks that were at the center of the ripple effects during this crypto winter.โ
Regulatory emphasis on Davos
Nigel Green, chief executive of one of the world's largest wealth management firms, deVere Group, took a similar tone.
This week, at the World Economic Forum in Davos, Switzerlandurged world leaders and influencers to address the issue of cryptocurrency regulations.
โThe time for endless platitudes about increased regulatory scrutiny is over. Action is required,โ he said in a statement. "If World Economic Forum attendees do not advance the crypto-regulatory agenda as a result of the 2023 summit, they will have failed spectacularly."
Read more: World Leaders Excited About Blockchain at Davos This Year, Despite Crypto Winter
Green offered three reasons why world leaders should take crypto regulation seriously:
- The growing role of cryptocurrencies in the financial system
- The need for greater scrutiny to protect investors after collapses like Three Arrows Capital and FTX
- The importance of boosting the economies of emerging countries
Any regulatory framework must balance the protection of investors and the financial system with the decentralized nature of digital assets and the need for freedom to innovate, according to Green.
Green also recently commented on the recovery in digital asset prices, noting that the recent crypto winter appears to be thawing out.
โOf course, the crypto market will not go in a straight line, no market ever does, but we expect the bears to go into hibernation and the bulls to be ready to run,โ he said in comments made over the weekend.
Zheng said regulatory clarity is necessary for a long-term return of investor optimism.
โCrypto market cycles come and go,โ Zheng said. โThis time is not unlike the previous three extreme bear market cycles during Bitcoin's short 14-year history. The crypto market is driven by fear and greed, just like any other financial market. Bitcoin's long-term thesis remains intact. Crypto investor confidence will return, especially when the market is regulated more appropriately for institutional investors."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
