Summary:
- 2022 was a year of ups and downs for crypto, underscoring the need for reasonable regulation in the U.S. and globally; we can expect bipartisan legislation and regulation from the new “Crypto Congress” as well as state legislatures in 2023.
- Crypto has huge implications for national security and democracy. The Ukraine war was a “watershed moment” for the world’s understanding of crypto’s importance, but we also need to manage risks, like the North Korea threat.
- There are legitimate demands for privacy, and in 2023, we can expect decentralization to be a major focus.
- These are some of the key findings from the Crypto Council for Innovation’s end of year debrief, which brought together leaders from Archetype, Block, CoinDesk, Espresso Systems, Fortune, and the Former Deputy National Security Adviser for Combating Terrorism. Listen to the recording.
2022 was a “year of whiplash” for crypto, said Crypto Council for Innovation (CCI) CEO Sheila Warren—from Biden’s executive order and the EU’s approval of Markets in Crypto Assets (MICA) to Russia’s invasion of Ukraine highlighting critical use cases followed by a “summer of all kinds of things going wrong” and the FTX meltdown.
But it was also a year of building—including for CCI, as 2022 was “the year CCI really turned operational,” she added.
CCI hosted a lively discussion with its team and industry experts to reflect on lessons learned in 2022 and what to expect in 2023—here are key takeaways.
Thanks to Melissa Netram, Head of Bitcoin and Crypto Policy, Block; Katherine Wu, Venture Partner at Archetype; Juan Zarate, Former Deputy National Security Adviser for Combating Terrorism; Michael Mosier, General Counsel, Espresso Systems; Nikhilesh De, Managing Editor, Policy, CoinDesk; and Jeff John Roberts, Crypto Editor, Fortune.
Lesson #1: Crypto is bipartisan
“The partisanship of crypto is and remains not left or right, but crypto,” said former U.S. Sen. Cory Gardner, CCI’s Chief Strategist of Political Affairs.
“There are a lot of criticisms of Congress as being too partisan” and unable “to get things across the finish line,” said Brett Quick, CCI’s Head of Government Affairs, North America.
But when it comes to crypto, we “see a lot of work being done in such a bipartisan fashion”—such as the stablecoin regime proposed by U.S. Reps. Maxine Waters (D-CA) and Patrick McHenry (R-NC), or the digital assets regulatory framework proposed by U.S. Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY).
Expect more progress in 2023, with what CCI’s calling “the Crypto Congress.”
“The collapse of FTX has really underscored the need for regulation in the United States,” said Quick. “But what it’s also done, I think, is given policymakers an opportunity to pause and reflect,” and ensure regulation is “correct” and comprehensive. She expects to see more focus on market structure and defining what is a security.
Meanwhile, watch for state activity on issues like privacy and environmental issues: “What Congress fails to do, the states will end up trying to do,” said Gardner.
Lesson #2: The evolution of digital money will have huge implications for national security and democracy.
“From a security point of view, it’s clear crypto no longer is operating in a vacuum,” said Yaya J. Fanusie, CCI’s Director of Policy for AML & Cyber Risk. “How this evolution of money—of digital money—shapes out is going to have huge implications, particularly for U.S. national security” and the “geopolitical order.”
Case in point: Russia’s invasion of Ukraine, “a watershed moment for a lot of people because it showed that crypto is going to have its place,” continued Fanusie. “That was a verifiable instance of a use-case solving an issue in a crisis that no one could ignore.”
“I shudder to think what would be the situation in that part of the world if we hadn’t had the ability, if we hadn’t been set up and structured as a digital economy,” said Warren.
But there are risks, too, noted former Deputy National Security Advisor and Treasury Assistant Secretary Juan Zarate, who authored CCI’s recent report on the North Korean crypto threat—such as the misuse of this technology particularly by “state authoritarian or revisionist powers like Russia, China, Iran.”
Key questions he wants us to ask: “What happens systemically to the financial system, which again is core to the global economy, but also global security? Who is defining the rules of the road—not just in terms of regulation of crypto in front of us, but the payment rails and the systems of the future?”
“There’s an opportunity in 2023 as we emerge from the crypto blizzard to think more clearly about how we risk manage so that we can take advantage of this technology,” he continued, “and so that the U.S. in particular, from a national security perspective, can be at the forefront as opposed to simply reacting.”
Lesson #3: There are legitimate demands for privacy and decentralization.
Many advances in 2022 were related to “privacy tech,” said Michael Mosier, General Counsel of Espresso Systems, which is developing scalable, configurable privacy for digital assets.
While OFAC’s sanctions on Tornado Cash targeted illicit finance actions from North Korea, “80% of that use was actually not tied to known illicit activity,” noted Mosier, proving “demand by legitimate actors for privacy is a matter of security for overexposed ledgers.”
Web3’s calls for “democratization and privacy at the base layer, if anything, are vindicated when you see that Web2—Twitter—can be bought by a new guy who releases DMs and private emails on a whim,” he added. “There are political dissidents in Hong Kong that may be wondering if the Chinese government presses Elon for his Tesla supply chains, is he going to give up their DMs?”
“I think the value of Web3’s decentralized architecture is very much going to be in focus for 2023,” he continued, as projects begin to prioritize decentralization, not just on “local front-ends” but also deep in the infrastructure.
Lesson #4: The building continues
Fortune’s crypto editor Jeff John Roberts remembers the “hangover of 2018” but said that the building continues. “I remember, you know, the hangover of 2018 and this is probably the worst hangover yet, but just this week my team covered stories about the UN using stablecoin to help refugees…and then you see PayPal integrating Metamask. I think it’s really important to remember, people are still building this thing. It’s gonna continue once this kind of like horrible couple months is over. And I think next year’s gonna be more fun.”
“I think one of the highlights this year was watching the execution of the Merge,” said Katherine Wu, Venture Partner at Archetype. “It was honestly surreal and is certainly a moment I think a lot of us in the, in the industry will, will never forget.” She mentioned that average transaction per second on layer two actually surpassed that on layer one and we are “slowly but surley seeing Ethereum starting to scale.”
Wu also highlighted that Q3 in 2022 was actually the most robust quarter to date for Ethereum. There were 17,000 smart contracts deployed monthly on Ethereum, which is up 160%. The number of dabs with active users hit a record increasing 12 x to 12,000, and one third of all smart contracts ever deployed and verified, took place this year all despite Ethereum and other smart contract platforms, trading at significantly depressed prices. “So certainly lots to be excited about,” Wu said.
Looking ahead Wu is excited about Proto-Danksharding. “I know that sounds really confusing, but I think this is a really important technological improvement if it goes live because it basically will create a cheap place for L two solutions to post data on Ethereum. And the impact of that is that transaction fees that users pay on L two s will be lowered by a lot. Now, if successful, that will be a major achievement for the Ethereum community.” Wu said.
The bottom line: The Crypto Congress is coming—and 2023 will bring opportunities to shape regulation.
When it comes to crypto regulation, many other countries are already ahead of the U.S.
CoinDesk Managing Editor Nikhilesh De spoke about reporters covering these events around the world. “We’ve had reporters sitting in the European Parliament when MiCA was getting discussed. We’ve had reporters sitting in on UK treasury committee meetings for bills that are going on through Parliament. We’ve had folks sitting in on congressional testimony here in the US.
“I think it’s important that we keep in mind that this is a global technology, and regulation is happening,” said Melissa Netram, Head of Bitcoin and Crypto Policy at Block. “A lot of geographies already have structures in place or have something teed up… and I think in light of what’s happened over the past month or so, a lot of regulators around the globe are gonna be assessing whether or not they have the right safeguards in place to enhance market integrity, consumer and investor protection.”
“Crypto regulation is coming our way,” said Linda Jeng, CCI’s Chief Regulatory Officer and General Counsel, “and it is now an opportunity for us to help shape that regulatory dialogue.”
