The development of Web3 and this year’s crypto got serious

The past year can very well be considered groundbreaking when it comes to the development of cryptocurrencies and Web3 in general. Numerous events around the world, some tragic, have brought digital assets into the purview of financial regulators like never before – leading many to conclude that the sector has finally gotten “serious” this year.

At the same time, the mass adoption of cryptocurrencies continues unabated among mainstream users and institutions, and this trend will only grow in 2023 and beyond.

Lessons learned the hard way

The most important event that affected crypto – and the whole world – in the last year is undoubtedly the war in Ukraine. When it started, governments around the world realized that it was possible to send millions of dollars worth of digital assets to a country to buy weapons – without any oversight. While the Western world agreed that this was acceptable in Ukraine’s case, it occurred to politicians that the same could be done for any terrorist organization.

As a result, Germany’s Federal Intelligence Service (Bundesnachrichtendienst) and the FBI began hiring technical specialists a lot to reduce the risk of Russia undermining sanctions via crypto.

This is where Western law enforcement agencies began to put more focus on regulation.

In turn, and in what was the second biggest event for crypto, came the Queen’s Speech in the UK, outlining the government’s plans to introduce legislation to reduce financial crime and help crypto businesses grow. Similarly, the European Parliament introduced a legal framework for cryptoassets in the EU in March 2022 to “enhance the benefits and mitigate threats” of crypto. Also, the US Securities and Exchange Commission recently announced that it would be focusing on cryptocurrencies going forward, laying out plans to enact its own rules.

While heated debates about crypto regulation have raged for years, we now know that regulators are stepping in to champion new technologies while ensuring that consumers are protected and criminal elements are weeded out. This represents a watershed for crypto – the point where the industry grew up.

Cryptotechnology must “disappear”

As for where we go next, in terms of mass adoption of cryptocurrencies, we really need the technology to “go away”. In other words, it shouldn’t be visible to regular retail users, nor should they need a degree in cybersecurity to interact with it. This starts with the basics, i.e. the user experience. You can’t expect people to remember very complex addresses or write down 12 random words on a piece of paper.

Also, the idea of ​​decentralized finance (DeFi) and “Not your keys, not your coins” is a fallacy – more money has been lost due to people misplacing their keys than via any exchange hack ever. DeFi is a great tool when you know exactly what you are doing, but it cannot be applied to the vast majority of users, especially those who are not crypto-native.

Most people don’t care if they’re using crypto or fiat currencies when they swipe their phones at a grocery store. To be truly useful, these intricacies must disappear “under the hood” so that users are not inundated with redundant technological challenges.

Institutional commitment in 2023

Meanwhile, it’s not just retail users who can benefit from the seamless integration of crypto into traditional financial systems. Over the past few years, many institutional companies and brands have started dipping their toes into decentralized technologies, and this trend will gain even more momentum in 2023.

For example, brokerage giant Fidelity Investments recently launched a new crypto trading product for retail investors. Meanwhile, many more non-crypto-native firms and even family offices have started actively looking for new ways to engage in digital assets.

Notably, some of them got into crypto via prominent and well-respected, at least at the time, crypto platforms – some of which haven’t turned out so well. So going forward, these firms will focus even more on due diligence, which is why regulatory frameworks must be further developed.

Businesses should be able to discover their crypto partners’ backgrounds, where their assets are, how they’re stored and whether they’re compliant – everything you’d expect to be able to find out about your bank, really.

Furthermore, more non-crypto platforms are likely to start offering digital products in 2023. This is likely to result in an ecosystem where financial services tend to merge. Instead of different apps for insurance, savings, bank accounts or crypto, we will see the concentration of different trading options and savings and pension plans in the fintech area.

However, for this to happen, certain elements must be rooted in authority. Even DeFi platforms still rely on centralized operators, such as stablecoin issuers, so there is no such thing as “absolute” decentralization.

Ultimately, digital assets will become “the norm” and so ingrained in our daily lives that even the term “crypto” will disappear in just a few years. Web3 will become an integral part of the worldwide financial system and services going forward.

Larry Fink, CEO of investment monolith Blackrock, has already nodded toward this future, noting that “the next generation for markets, the next generation for securities, will be the tokenization of securities.”

With blockchain technology offering reduced fees, reduced reliance on intermediaries and instant settlement, its introduction into the traditional financial system is a no-brainer. In turn, this will provide much-needed legitimacy to the sector, further validate existing products and promote greater adoption.

“Crypto winter” is a time of construction

As for the current “crypto winter,” it could actually be a net positive for the industry in the long run. Although many refer to this period as the toughest crypto winter in the history of the industry, the builders and developers have not gone to sleep.

Instead, the industry works hard to bring out better products and services. Algorand increased performance by more than five times via a network upgrade in September. And the Ethereum Merge – which saw the network transition to the more efficient proof-of-stake mechanism – went off without a hitch, boosting Ethereum’s sustainability credentials and paving the way for greater scalability in 2023.

So although some projects have dropped this year, and some have been washed out of the market, the industry has not come to a standstill. Valuable lessons have been learned this year and will in turn create better, more reliable and more secure services as we move into 2023. As crypto gets serious, so will consideration for adoption by mainstream firms and the public.

Martin Hiesboeck, Ph.D. is head of research at Uphold and a consultant for data analysis, blockchain and crypto implementation, tokenization, DeFi, web3, stablecoins and CBDCs.