The crypto and blockchain industry desperately needs a win in 2023

Due to high-profile failures in 2022, those looking to promote blockchain as a key solution for financial industries will need to demonstrate some success if they are to regain momentum.

The crypto industry suffered some severe blows in 2022. A virulent combination of incompetence and evil brought first the Terra/Luna stablecoin ecosystem and then FTX, until recently the second largest cryptocurrency exchange in the world. The consequences for cryptocurrency market capitalization have been devastating.

Optimists say these events will serve to blow away the speculative froth, shake out the bad actors and allow the rest of the industry to get on with building some truly valuable applications for blockchain under renewed scrutiny by regulators.

Perhaps they are right, but even those outside the crypto speculation game who want to make blockchain work for the financial world will have a lot of work to do in 2023 to overcome the failures that occurred towards the end of last year.

As the crypto collapse grabbed headlines, Sopnendu Mohanty, head of fintech at the Monetary Authority of Singapore, said the Australian Securities Exchange’s decision to abandon its blockchain stock exchange project after six years and A$245mA$255m ($164m-$171m) ) invested would have a greater impact on the use of blockchain.

Speaking at the OMFIF Asia Forum in December, Mohanty called the development ‘a failure’, saying ASX’s blockchain project ‘was supposed to be the leading light showing how distributed ledger technology can change everything and make processes super efficient, and it collapsed.’

Shortly after the failure of the ASX’s blockchain replacement project, TradeLens, a blockchain-powered supply chain ecosystem, announced that it would also cease operations in early 2023. The project was a joint venture between AP Møller Maersk and IBM, and its demise signals the end of one of the more promising avenues for enterprise blockchain deployment.

These two events have seriously dampened hopes that the promises made about the blockchain’s ability to revolutionize processes in the financial markets will be realized. This, combined with the collapse of cryptocurrency value, has robbed the industry of much of the momentum that remained after central banks around the world began to tighten monetary conditions and the wave of cheap credit began to ebb.

But despite the loss of momentum, Mohanty is far from ready to throw in the towel on blockchain. He confirmed that Singapore remains invested in DLT as a technology that can add value by changing business processes.

It may take a more radical approach to governance. Mohanty suggested that some of the problems that emerged in 2022, particularly regarding FTX, stem at least in part from an excessive centralization of control. Mohanty pointed out that this was possible due to the creation of private, permissioned blockchains designed to fit in with existing players’ preferences. He suggested going back to the original public blockchain model.

The cryptocurrency industry also needs to make changes. At the same panel, Rana Kortam, director of global public policy at Binance, said: “It is up to us at Binance and all players to hold ourselves to a higher standard. The companies that differentiate themselves will be those that adopt the right risk management measures.’

The panelists also agreed that DLT has a lot to offer when it comes to modernizing cross-border payments. That could involve the use of effectively secured stablecoins, as suggested by Binance’s Kortam, or bank-issued deposit coins as suggested by fellow panelist Naveen Mallela, CEO of JP Morgan’s Onyx Coin Systems project.

Andrew McCormack, head of the Bank for International Settlements’ Innovation Hub in Singapore, warned that while blockchain-based solutions such as these may seem attractive, the proliferation of these types of systems may well lead to fragmented liquidity unless an effective solution for interoperability is found.

Lewis McLellan is editor of the Digital Monetary Institute, OMFIF.