With US crypto regulations on the way, enjoy the last crypto winter
Are you wearing your skis? If not, post and try to have fun, because this is going to be our very last crypto winter. We’ve had two or three, depending on how you count, and this one has certainly been the worst and most frustrating, but thankfully it’s going to be the last, and let me explain why: Crypto and blockchain are on the cusp of becoming mainstream, regulated businesses. Although it is always extremely difficult to separate signals from noise, I see three big positive signs for the future.
Paul Brody is EY’s global blockchain leader and a CoinDesk columnist.
The world of crypto and blockchain has always had an uneasy relationship between starry-eyed do-gooders (count me among that crowd) and ruthless opportunists trying to hijack that message to sell whatever they’ve come up with. One of the things that has been hugely frustrating over the years is seeing the warnings we and others have made about the dangerous, speculative and downright absurd nature of some crypto and blockchain investments go unheeded. We (EY) warned about the dismal track record of initial coin offerings (ICOs) in 2018 and again in 2019, and we were hardly alone in expressing our concerns. Enforcement actions are much more effective than warnings and flame wars on social media.
Many countries, primarily the United States, have complex and decentralized regulatory systems. If we can’t get everyone in the blockchain world to agree on what the guidelines should be, we shouldn’t be surprised that regulators don’t completely and immediately agree either. What is useful is that the legal system must try to give a consistent opinion about how the law is applied. In those cases, regulators must present a clear and consistent understanding of what the law entails. It will take some time for this clarity to emerge, but it will.
The boom in the tech industry tends to happen when expectations and excitement far outstrip companies’ capacity to actually deliver products and earn revenue. This happened in technology in the early 1980s, when video game consoles and PCs hit the scene, but before the world had found the right applications to drive enterprise adoption. A second, much larger, boom cycle emerged in the late 1990s when network technologies and the Internet generated enormous excitement but not much in the way of revenue or profits. Not unlike many blockchain and crypto business models in 2018-2022, the dot-com bubble saw companies go public or raise hundreds of millions of dollars without meaningful revenue streams, or sometimes without even well-structured business plans.
The parallels with the dot-com boom and associated bust are worth remembering. Both industries saw huge growth in investment and valuations based on seemingly impossible promises of future capacity. Back in 1999, about $350 billion in digital online transactions occurred, and most of this was using legacy B2B systems like Electronic Data Interchange (EDI), not consumer e-commerce from a web browser. Bold predictions made at the peak of the dot-com boom by major investment banks, academics and forecasting firms said that between $4 trillion and $6 trillion in online commerce would occur annually by 2005. This turned out to be ridiculous. In fact, total e-commerce (of the consumer browser type) reached $105 billion in 2005. It’s no surprise that market capitalizations plummeted and many of the lavishly funded companies involved went bankrupt. In the year 2000 alone, nearly $1.75 trillion in technology market value disappeared. For those of you keeping score at home, that’s about $3 trillion in 2023 dollars and more than the entire market cap of the blockchain ecosystem.
And this is where the story gets interesting: Today, e-commerce and online business are everything we were promised in 1999. Total global e-commerce spending is projected to approach $5 trillion by 2022. It topped $1 trillion in the US alone in 2022. The market cap to the world’s top 10 technology companies is around $7 trillion. Technology stocks represent more of the US stock market than the financial and energy sectors combined. And while there have been ups and downs, there hasn’t been a single tech bust since 2000. The reason for that is simple: Technology has become a mainstream industry where valuations are driven by revenue and earnings growth, not star-studded predictions about the future.
The signs of maturing blockchain and crypto products and businesses are also beginning to emerge. Although it is early days overall, non-fungible tokens (NFTs) appear to have found a permanent place in the user and business ecosystem both as collectibles and as digital trophies, tickets and proofs of engagement or attendance. NFTs have become so simple and easy to create that anyone can offer them. Want my personal NFT for the month? Claim it here. At EY, “boring” businesses such as supply chain management, product traceability and emissions tracking are growing as industrial companies put blockchain to work for use cases that have nothing to do with financial development. Privacy technology (not to be confused with anonymity) has proven to be the key to unlocking practical use cases among companies looking to leverage shared, public technology infrastructure without sharing their sensitive business information.
As we clear a path through the wreckage of crypto winter, the same bright future for the blockchain industry will come. Bad actors go to jail. The rules become clearer. And most importantly, the companies involved in this ecosystem are starting to build real products and have valuations based on revenue and profits. The result is that blockchain and crypto can become mainstream industries with regulated products and outputs that are widely available. As a normal industry, we will still have ups and downs, but we will no longer have ridiculous booms. So enjoy this crypto winter. It’s the last one you get.
