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Digital assets in crisis – what needs to be done to restore trust?



The digital asset market had a calamitous year in 2022, with its aggregate market value tumbling from nearly $3 trillion in November 2021 to less than $795 billion at the end of December 2022, according to CoinMarketCap.com. That is a drawdown of 74%. Combine that with Bitcoin losing 65% of its value in 2022 and the seismic collapses of FTX and Terraform Lab, it is no wonder that investors, regulators and digital asset firms are scratching their heads as to what the future holds.


Two things are clear. The world needs a common global regulatory approach as digital assets continue to become mainstream. Secondly, digital asset firms, which have seen their reputations tarnished by the unscrupulous actions of others, need to rebuild trust. Increased transparency, better education of investors and partners, and greater explanation of how they are insitutionalising their businesses for the benefit of all stakeholders, are musts.


Time for a common global regulatory approach


The aspirations of the digital asset industry founders to create a new, socially equitable financial system were laudable. However its ultra-fast rise without the safety net of a robust global regulatory framework has enabled fraud – or sheer foolishness - on a huge scale.


If we have learned anything in the past year, it is that the industry’s fortunes can have a profound impact on global markets. Few would deny that the new world of crypto needs tougher global regulations and, eventually, legislation to enhance investor protection and market integrity and to avoid future disasters.


Regulators across the world have been busy. In the United States, the Securities and Exchange Commission has banned new issuances of Binance’s USD stablecoins and prevented Kraken from providing staking services to US investors. In Asia, the Hong Kong Monetary Authority plans to address financial stability risks and promote the orderly and sustainable development of the industry, particularly in relation to stablecoins. Simultaneously, the Hong Kong Securities and Futures Commission is pivoting to relax retail trading. This contrasts to the approach being taken by The Monetary Authority of Singapore, which is proposing measures to reduce risks to consumers from cryptocurrency trading.


While the pace of regulation is accelerating in individual markets worldwide, the adoption of a common global regulatory approach is lagging. A more uniform cross-border regulatory approach is required. In the meantime, expect more litigation and fines.


Crypto is here to stay


So, what can we expect from the year ahead and what role can communications play in rescuing the reputation of digital asset firms and helping firms walk the talk?


There are as many predictions as there are cryptocurrencies. The co-founder of Ethereum, Vitalik Buterin, believes uncertainty has already begun to be mitigated and will continue to decrease — leading to greater price stability over time. Bill Ackman, billionaire manager of the hedge fund Pershing Square Capital Management, known both for his large public gains and losses, tweeted last November that crypto can enable the formation of useful businesses and technologies that hitherto could not be created. On the other hand, trusted ‘institutions’ like Warren Buffet are sticking to their sceptical stance on cryptocurrencies, and Bitcoin, having famously labelled it “rat poison squared” a few years ago.


However, whether Mr Buffet likes it or not, some world-leading institutions including BlackRock and Fidelity, are now offering clients digital assets services and investments through partnerships with digital asset exchanges. Central banks are also experimenting with digital currencies; India’s central bank recently launched an e-rupee pilot scheme. Here in Hong Kong, DBS Group just announced that it is planning to expand its cryptocurrency services, spanning asset trading and even lending once regulations have been outlined. Overall, the message is clear: “Crypto is here to stay.”


The role of communications


As a result, it is more important than ever for reputable digital asset players to clearly communicate their strategies to stakeholders and differentiate themselves from high-profile casualties.


The first step is clearthey must engage with regulators in consultation processes and support governments’ education programmes to help both the financial services industry and the public understand the prospects for the asset class as well as its inherent risks.


Secondly, partnering with traditional institutions, industry associations and academics is important. The Crypto Fraud and Asset Recovery Network is a good example of lawyers, forensic accountants, regulators and academics joining forces to share best practice in driving standards in the digital asset industry.


And, of course, companies need to outline a roadmap for growth and provide regular business and project updates. They must prove their financial soundness and liquidity, so publishing their financial results, accredited by independent auditors, will be key.


Perhaps the biggest lesson to be learnt from the past year is that digital asset companies need strong leadership, but not cult-like frontpeople. The light-speed demise of Sam Bankman-Fried from hero to zero says it all.


This article was written by Marylène Guernier, Partner and Fintech Lead at SEC Newgate Hong Kong. Viewpoints is an article series contributed by members of PRHK, Hong Kong’s PR and communications association.

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