The baton has been passed to a new FinTech team, and we have hit the ground running. As one of the first think tanks to explore the evolution of the FinTech industry, the Milken Institute FinTech program is excited to bring you our insights on news, current events, and policy developments. Our work is built on the pillars of financial inclusion, access to capital, transparency, and compliance, and we’ll continue to ask industry stakeholders how FinTech can be a multiplier of economic mobility for all.
We have big plans for the rest of the year. We’ll interview industry thought leaders, feature the next FinTech innovators and unicorns, and keep you in the loop on what’s happening on Capitol Hill. We’ll also share global trends focusing on developments in emerging markets.
We look forward to your readership and welcome your feedback.
Nicole Valentine
FinTech Director
Christmas in July: The Crypto Winter
In the past month, the once $2 trillion crypto market has been shaken to its core. The recent turmoil was caused by a confluence of factors—an ongoing rout of crypto assets, failures of some digital assets, and broader macroeconomic conditions.
The price of Bitcoin (BTC) has fallen under $20,000 from an all-time high of $68,789.63 in November 2021. This bear market has spread panic, driving down the prices of nearly every Web3 native asset. According to The Wall Street Journal, the recent drop in the crypto market has added evidence against claims that crypto can act as a hedge against other broadly risky assets in the market, as the S&P 500 experienced its own 22 percent decline over the past year.
A series of frauds and runs on crypto products during this broader market route has further undermined confidence in the space. NFT rug pulls have scammed hundreds of millions of dollars from retail investors. As Gizmodo noted, frozen withdrawals at Celsius and CoinFlex have locked investors out of their holdings. According to the Kenan Institute of Private Enterprise, the failure of the purported algorithmic stable coin Terra USD has eliminated $83 billion in market cap from the crypto market and spurred a broader run on stable coins.
This crisis of confidence has been compounded by macroeconomic conditions in the US, which have led some institutional investors and many retail investors to pull their investments from crypto. As interest rates, inflation, and bond yields rise, speculative assets like cryptocurrencies become comparatively less attractive to investors.
This pullback has led to a substantial loss of market cap, increased volatility, and triggered layoffs throughout the Web3 space. By late June, Coinbase, Crypto.com, Gemini, and BlockFi had laid off a combined 1,700 workers after a year of record growth, according to Business Insider. While this crypto winter feels like it will be cold and long, new developments in the Web3 space have made this crash different.
Takeaways: Crypto Pioneers and the Future of the Internet
At the Milken Institute Global Conference in Los Angeles in May, two panels focused on the recent developments of Web3 and DeFi in the financial sector. The panelists identified several key factors fueling the staying power of these emerging technologies. Several of these observations will continue to hold true as the crypto market moves forward from today’s crisis.
As crypto emerges from this winter, there will be more regulatory clarity. Speaking at Global Conference, Coinbase CEO Brian Armstrong and ARK Invest CEO Cathie Wood discussed how regulatory agencies are now beginning to keep pace with crypto innovations on the panel Conversations with Crypto Pioneers. The different services offered by Web3 firms are becoming better understood by regulatory figures in the US and abroad. Coinbase has received licensing as a brokerage, a qualified custodian, and with the Commodity Futures Trading Commission (CFTC). Improved familiarity and reduced skepticism among regulators are facilitating the adoption of Web3 and crypto services, platforms, and products.
Brian Armstrong noted the new political pressure that is being exercised by American crypto users and the crypto curious, who make up 20 percent of the US population, according to CNBC. The emergent political force of crypto users has created an incentive for congressional and regulator policymakers to become more attentive to the crypto space.
And, indeed, regulatory clarity is coming. On June 23, the US House Agriculture Committee’s Subcommittee on Commodity Exchanges, Energy, and Credit convened a hearing on The Future of Digital Asset Regulation. Testimony called for clear guidelines on the jurisdictional boundaries between the US Securities and Exchange Commission and CFTC, emphasized the global nature of digital assets regulation, and covered the need to adequately resource regulators to manage the digital asset market. Subcommittee members expressed their concern over the risks presented by the market and their desire for the US to become the leader in the digital asset space.
In addition to achieving regulatory credibility, crypto and Web3 have attracted the interest of institutional investors. Cathie Wood noted on the Crypto Pioneer panel that major American banks, retirement funds, and mutual funds have begun offering crypto as an asset class to investors. Whole new crypto-native investment funds have emerged on the scene. Institutional backing has enabled individual investors to enter the crypto market at an unprecedented scale, driving demand for coins, tokens, NFTs, and adjacent services.
Institutional legitimacy and regulatory clarity have created conditions where a true Web3 ecosystem has started developing. Payment processors, websites, and retailers have begun accepting crypto as payment. Employers have begun offering cryptocurrencies as part of compensation and retirement packages. Decentralized social media platforms are being built around the metadata in blockchains to create even more personalized online spaces. In this rapidly growing online world, a crypto wallet may soon be as ubiquitous and essential as having an email address.
Lastly, it is increasingly clear that Web3 is unequivocally a global phenomenon. Speakers emphasized blockchain technology’s unparalleled ability to facilitate low-cost international transactions around the world at our Global Conference panel Understanding Web3 and the Future of the Internet. Panelist Sopnendu Mohanty, chief FinTech officer at the Monetary Authority of Singapore, discussed how Web3 is being explored in Southeast Asia to reduce payment settlement times and transaction costs between central banks in Southeast Asia.
In the past two years, El Salvador and the Central African Republic have become the first two nations to adopt BTC as legal tender, facilitating the low-cost movement of remittances, according to the BBC. India has started to clarify its position on crypto as a legal asset, opening the door for crypto’s use in the country’s $50 billion remittance market. Around the world, regulators, institutions, and innovators are experimenting with Web3. The recent market downturn does not spell the death of crypto. Once the smoke clears, we will not see El Dorado, but there will still be a foundation for growth underlaying the industry.