2023 Informed: 4 blockchain and crypto forecasts for the year ahead

1: Crypto regs are coming

“With the collapse of FTX, the ‘crypto winter’ and the breaking of Terra UST’s peg – 2022 has been a challenging year for the cryptocurrency sector. Consumers were attracted to this volatile asset class which offered steep returns compared to traditional markets. But the collapse that followed served as a potent reminder of why we have financial regulation in place to protect people.

“2023 will call for more stringent rules which will turn into demands. Governments and regulators will realise they can no longer expose consumers to unsupervised exchanges who seemingly had a licence to print money and generate steep losses for those who could least afford it. Furthermore, the size of the cryptocurrency market has grown significantly. It now can act as a contagion to the rest of the financial system, triggering concerns from regulators who need to act and mitigate risks with appropriate rules.

“Recognising the need for regulation is one thing: designing, agreeing to, and implementing it is quite another. We can take an example from the EU who is leading in the space. Its Markets in Crypto-Assets Regulation bill serves as a solid example of a comprehensive regulatory framework.”

Gilbert Verdian, CEO & founder, Quant

“While there’s been rapidly increasing acceptance of cryptocurrency in recent years, the industry has been shaken up by the recent FTX collapse, highlighting once again how volatile the space is. It is a fragile market and represents a considerable systemic risk, particularly as the fall of one token significantly impacts the whole market.

“Crypto regulation is a responsibility that needs to be taken seriously by regulators worldwide and we welcome debate around the future of the market. However, leaving crypto unregulated would be a grave mistake. With the uptake of crypto among retail investors and financial institutions (particularly in asset management), the ripple effects of simply letting “crypto burn” as some have argued, would have far-reaching consequences.

“We believe we will see a regulatory reckoning in the next 12 months. We envisage a world where regulation is sufficiently sophisticated to protect retail investors and make crypto a more stable investment for financial institutions.”

Matt Smith, CEO, SteelEye

2: As banks look towards other blockchain use cases there will be a scramble to recruit DLT developers

“As the crypto world becomes staider and more sensible, layer 2 technologies that were hastily and poorly designed will start to disappear. The more useful and usable networks will be left intact, stronger than ever. The hype will die down and crypto enthusiasts may well turn their attention to other use cases for blockchain.

“They will likely continue to look for assets with low barriers to entry, part of crypto’s appeal. Tokenisation offers improved access to illiquid assets. For example, in cases where start-up funding is limited to a small pool of sophisticated ‘LPs’, tokenisation and the right regulatory framework could enable smaller investors new, promising opportunities.

“We have already seen established firms like State Street, JP Morgan, and HSBC appoint ‘heads for digital assets and distributed ledger technology (DLT) specialists as they roll out tokenisation projects. 2023 will see these skills become increasingly in-demand as financial services firms realise the value of blockchain in enhancing their operations and adding new revenue to their bottom line.

“The challenge lies in finding the right people: only about 1 per cent of developers have the specialist knowledge required to work with digital ledger technologies, given each has unique rules and languages. A developer trained in a specific DLT can cost over £100,000 per annum, yet their skills are not always transferable to other DLTs or re-deployable to non-DLT projects.”

Gilbert Verdian, CEO & founder, Quant

3: After some political wrangling, central bank digital currencies will prevail

“Nineteen of the G20 nations are now piloting CBDC projects which means governments will need to address public concerns around individual privacy as part of broader education around the potential benefits of CBDCs.

“We predict further political grandstanding on this issue, especially in the US, where libertarian and republican senators have already spoken out against the introduction of CBDCs. Their position is in stark contrast to the prevalence of CBDCs in China, where the digital yuan has seen transaction volumes surpass $14 billion. However, democratic nations will need to compete as the world changes, and CBDCs become part of international trade, financing and cross-border settlement.

“2023 will see further focus on building CBDC infrastructure that values consumer protection, privacy, and interoperability. But ongoing politicisation of CBDCs may remain a stumbling block.”

Gilbert Verdian, CEO & founder, Quant

4:  Cybersec for smart contracts and blockchain will step up

“We’ll see even larger bounty rewards become the norm in 2023 for ethical hackers in the Web3 space, as stakes continue to rise during the biggest year for cryptocurrency hacks on record. From FTX’s recent collapse to the numerous smart contract hacks we’ve seen this year (the most in one month, ever, this October), regulators and organisations alike have noticed cryptocurrency projects woefully lacking in security.

“A critical vulnerability in a web3 project could mean a huge payout for a malicious actor and serious financial impact on thousands of people. It makes sense that rewards to hackers should match the damage of a potential breach when this much money is at stake. Coinbase is a great example of an organisation that’s already anticipating this shift: it recently paid a hacker $250 thousand for identifying a critical vulnerability. I expect we’ll see even bigger rewards for Web3 vulnerabilities in the future.”

Dane Sherrets, solutions architect, HackerOne

“Cross-chain ‘bridge hacks’ were, sadly, commonplace throughout 2022, with estimated losses running to billions of pounds. Bridges are the way to facilitate the transfer of information and assets from one blockchain to another, and so these hacks threaten public trust in the usefulness of blockchain.

“Bridges have fewer participants and operators than major networks, offering more vulnerabilities for an attack. In addition, bridges are typically designed with smart contracts to be executed on each chain. This smart contract code is often written by a small number of developers, and many times isn’t thoroughly checked, tested, or validated by the maintainers of the blockchain node software or other external experts. As a result, smart contracts may have bugs and vulnerabilities open to exploitation.

“In 2023, we’ll see the widespread introduction of some of these cybersecurity principles and safe custody solutions – with regulations catching up.”

Gilbert Verdian, CEO & founder, Quant