[Feature] The Future of Crypto: Restoring Trust in the Digital Asset Industry

2022 was a volatile year for the digital asset industry which was fraught with reports and news of fraud, funds' misappropriation, money laundering, hacks, and so on. This has inevitably spilled over to 2023. Trust and confidence in the crypto market is not at an all-time high (ATH).

So what can be done to address the issues of eroded trust and loss of confidence in the crypto market? One of the most common consensuses is to put in place well-considered, detailed and risk-based regulations.

Changpeng Zhao (CZ), CEO of Binance, wrote on his LinkedIn two weeks prior that "we believe that user confidence will be brought back by comprehensive, consistent and risk-based regulations, alongside industry-wide commitment to improvement." He also cited Binance's director of global policy, Rana Kortam's written portion in the blog which can be seen here.

Besides the dramatic rise and fall of Terra last May, another monumental event was the collapse of FTX. According to Chainalysis, about US$13 billion was pulled off centralised exchanges (CEX) following FTX's demise last November; what happened to FTX summed up all that is wrong with CEX for a blockchain technology that prizes decentralisation.

Au contraire, based on data from DefiLlama, decentralised exchanges (DEX) that permit users to trade peer-to-peer (p2p) and retain direct ownership of their assets, saw trading volumes more than double to US$51 billion in the week of FTX's meltdown compared to US$20 billion the week before.

DeFiLlama's aggregated total trade volume on DEXs hovers around 10% currently of the total on centralised counterparts.

Adjunct professor of global entrepreneurship at Hanyang University Lee Jang Woo, told Forkast, "We will see the decline of offshore centralised exchanges … which set up offices in lesser regulated territories such as the Bahamas." He added that strictly regulated centralised platforms will expand and more will be run by traditional institutions.

An example of what Lee is referring to is Singapore's DBS Digital Exchange known as DDEx, which currently only handles business from institutional investors and high-net-worth individuals. Lionel Lim, the chief executive officer of DDEx expressed in a 15 February press release, "We believe that the market has decisively shifted its focus towards trust and stability especially in the wake of multiple scandals that have rocked the industry." The number of customers registered on the exchange doubled last year to 1,200.

The digital assets arm of Japan's Nomura Holdings, Laser Digital, chief executive officer Jez Mohideen, echoed the same sentiments as Lionel, "What has happened over the last two or three months, particularly after FTX, there's no question that [crypto investors] are looking for solutions. You find very few [crypto] entities where there is a prospect of transparency, decent amount of due diligence and risk management.”

Chief operating officer of South Korea-based DA:Ground, Paik Hoon Jong, concurred that the "need for transparency will bring forward the next dominant trend in crypto trading." He said that platforms that guarantee higher compliance and security will also be favoured by institutional giants.

Mohideen pointed out that many of the recent crypto failures resulted from not following some of the regulations that are required in traditional finance.

Nadeem Anjarwalla, appointed last November as the Director of Binance East Africa, gave an interview where he offered insights and spoke on these issues.

“It takes huge amounts of effort to rebuild trust with consumers and with the population at large. It is an uphill task to make sure that we have the right principles in place…we published six commitments that we believe are key for healthy centralised exchanges and they cover a wide range of areas," he said. The six commitments published on their blog, can be read here.

According to Nadeem, in terms of building trust, the right protocols and security measures must be in place, "For consumers to be able to make informed decisions, they need to understand where their digital currency is stored, and how confident we are in these protocols that have been put in place for their digital currencies to be protected.”

When asked what needs to be put in place to help restore the industry's image and renew customers' trust in crypto, he listed three key points:

1) Cooperation with law enforcement in order to facilitate investigations and retrieve any funds that may be stolen

2) Better onboarding and quality control programmes to equip new projects with adequate security measures

3) Regulation can play a crucial role in the revival, long-term success, and broader acceptance of crypto

“Leveraging education and existing media channels to engage and communicate with target audiences" are imperative in building trust with target audiences "in order to provide them with more information, and accessibility to relevant resources to fill the knowledge gap.”

In any emerging technology, short-term volatility is expected. The main point is what we do about it. Based on the events that have transpired in the market, some things are clear. Digital assets will continue to become more mainstream so a more uniform cross-border regulatory approach is necessary to enhance investor protection and market integrity.

Increased financial literacy or better education of investors, stakeholders, partners, and users alike; more transparency and accountability by providing regular business and project updates and detailed reports; and better-suited security measures and crisis management, are musts.