The recent turmoil in the cryptocurrency markets and the accompanying regulatory actions against the top participants in the industry have diminished the appeal of the blockchain technology that underpins them to traditional financial operations.
The collapse of FTX in November 2022 marked the end of a year-long crisis in the cryptocurrency markets, during which price declines and scandals permanently marred the industry. And clashes between authorities and the blockchain industry have dominated this year. The largest cryptocurrency exchange in the world, Binance, was charged in June by the Securities and Exchange Commission for alleged trading irregularities, following the Commodity Futures Trading Commission’s example. Competitor Coinbase, which is listed on a public exchange, is also dealing with SEC allegations.
Blockchain technology attracted widespread attention in 2021, when cryptocurrency was at its zenith of popularity. Exchanges secured celebrity endorsements, signed high-profile sponsorship deals, and ran multiple million-dollar Super Bowl commercials, notably the now-defunct FTX.
During the market’s record-breaking bull run, the industry attracted large investments from venture capital funds as well. PitchBook, a supplier of capital markets data, estimates that in 2021 and 2022, investors invested almost $30 billion in cryptocurrency ventures.
The amount is expected to be closer to $10 billion this year, however, as investor euphoria has cooled and regulatory pressure on companies at the center of the blockchain revolution has led traditional finance to rethink its approach to a once-heralded new dawn for banking.
Carl Uminski, executive vice-president and partner of CI&T, which counsels firms on internal digital transformations, claims that the current macroeconomic recession has led enterprises to be revalued and resulted in some of them not receiving the funding they were expecting.
Since investors are being cautious at the moment and might not yet view blockchain as a valuable asset, it may be difficult for newer enterprises to implement these technologies as quickly as they had intended. Several well-known blockchain projects went horribly wrong at the end of last year, when the cryptocurrency industry was already reeling from the failure of FTX as well as that of fellow sector heavyweights Celsius and Three Arrows Capital.
The Australian Stock Exchange gave up on a plan to switch the clearing and settlement of shares to a platform based on a blockchain in November. TradeLens, an IBM and Maersk-developed supply chain solution for the shipping sector that was inspired by blockchain technology, was discontinued in the same month.
According to software engineer, author, and cryptocurrency skeptic Stephen Diehl, it is an illusion that some innovation teams in businesses have a directive from the C-suite to explore emerging technologies like blockchain.
However, the future of blockchain technology is not entirely gloomy.
Tokenization, which includes digitizing traditional assets and putting them on a blockchain, was dubbed the “next generation for markets” by BlackRock CEO Larry Fink earlier this year.
The London Stock Exchange Group is already aiming to establish itself as the first significant exchange to provide customers with a “end to end” blockchain solution, encompassing securities issuance and trading as well as reconciliation and settlement.
However, developments in artificial intelligence, a technology turning heads in traditional finance in ways that blockchains originally promised to, are hindering the blockchain’s efforts to enter the established finance sector.
According to Nick Delis, senior vice-president of international and strategic business at Five9, a cloud systems provider, banks can identify any interactions required using real-time data and artificial intelligence. They can designate basic enquiries to intelligent virtual agents while prioritizing high emotion, high stress contacts for human agents.
Banks can use data during the contact to provide real-time insights to customers, such as how their credit is being used, while showing them the respect they deserve.
Large amounts of data are already processed and analyzed with the aid of AI in the banking industry. Another common use case has been screening payments and transactions for potential financial wrongdoing.
However, as banks increase their use of AI to combat fraud and scams targeted at them and their customers, the impact on traditional banking may create new demand for a wider use of blockchain systems.
The stagnation in the macroeconomy, according to Uminski, which he blames for the slow development of blockchain, may eventually lead to sector growth.
Through the use of a decentralized ledger, he contends that blockchain can unquestionably improve the security of customer and bank records.
In the end, though, whether the larger crypto economy passes regulator scrutiny may determine whether blockchain is able to establish a home in traditional finance.
In addition to the SEC investigations against Coinbase and Binance, US officials have delved into even the most obscure aspects of cryptocurrency, such as decentralized finance, which does away with the requirement for a third party middleman like a bank.
Decoupled from speculative discussion, Diehl claims that the blockchain’s core technology isn’t all that fascinating or particularly practical. Since there is no rule prohibiting the use of slow, cumbersome databases, businesses are free to keep developing them, but they will never be useful to their operations.
