What to expect from the new year for the crypto asset industry?
The year 2021 proved to be special for the digital asset industry in many ways. While new waves in the health crisis continued to affect the economy as a whole, the crypto-asset industry was able to steer its course and navigate between several phenomena that had already begun in 2020: structuring, institutionalisation, democratisation and regulation.
In this document, Adan proposes to review the key events of the year 2021 for the sector, and shares its vision of the major issues and deadlines that await the players in 2022.
2021 : A landmark year for the industry
I – An exponential institutionalisation of the crypto-asset market
At the end of 2021, the world of crypto-assets interests and attracts more and more non-native actors of this ecosystem, who perceive its opportunities more and more. The interest in digital assets among the general public has grown even more: bitcoin, DeFi, NFT… all these words are now part of the daily life of many users, consumers and institutions.
More large companies are moving into crypto-assets:
- Companies no longer hesitate to invest their cash in bitcoin:
- After Elon Musk’s numerous outbursts about bitcoin, Tesla announces a $1.5 billion investment in “digital gold”.
- Microstrategy invests throughout the year in bitcoin until it holds approximately 124,391 units in December 2021.
- DeFi is preparing for interlocking with institutional actors:
- Aave launches Arc, the decentralised lending platform dedicated to institutional players.
- Société Générale and Maker DAO enter into a historic collaboration called “security tokens refinancing”.
- Financial players are further embedding crypto-assets in their strategy:
- Visa acquires a Cryptopunk (#7610).
- Paypal launches its bitcoin payment service.
- Société Générale announces that it is issuing its first structured product on a public blockchain.
- Lydia partners with Bitpanda to offer a crypto asset trading service to its users.
- Qonto allows its customers to invest in crypto-assets.
- Sports brands are in a frantic race for the NFT and metaverse markets:
- Nike announces the acquisition of RTFKT, a start-up specialising in the creation of virtual trainers in the form of NFT.
- Adidas lance sa collection de NFT “Into the Metaverse”.
- Social networks want to make crypto-assets part of their business model:
- Since September, Twitter has allowed donations to be made in bitcoins and hopes to eventually offer a service for NFTs.
- Facebook is renaming itself “Meta” and plans to launch its metaverse project in the coming months/years.
- Luxury also intends to make a place for itself in the crypto industry:
- LVMH has partnered with Cartier and Prada to deploy the Aura Blockchain Consortium, the first international luxury blockchain.
Central banks are stepping up their experiments…
- China announces the launch of its digital yuan and conducts its first experiments in different regions.
- In July, the Governing Council of the European Central Bank (ECB) officially launched a two-year investigation phase into the issue of a digital euro.
- The US Federal Reserve is taking a tentative interest in issuing a digital dollar.
- The Banque de France, the Swiss National Bank and the Innovation Cluster of the Bank for International Settlements (BIS) are joining forces to launch the Jura project, an experiment for the use of a central bank digital currency (CBDN) in a cross-border context.
- The Banque de France is continuing its experiments on MNBCs in consortium with other financial players.
…while private players are deploying crypto-assets collateralised with different types of assets:
- In 2021, private initiative stablecoins are increasingly being used. Driven by USDT (from Tether), USD Coin (from Circle), Binance USD (from Binance), DAI (from Maker) and a myriad of other assets, the total market capitalisation reached $150 billion by the end of the year. This compares to just under USD 25 billion in market capitalisation in December 2020.
- Coinhouse and Nomadic Labs have teamed up with Casino Group and Société Générale to launch the Lugh (EURL), the first French stablecoin backed by the euro.
- Tether announces the launch of EURT, a stablecoin backed by the euro and available on the Bitstamp platform.
- Reflexer’s RAI is issued on Ethreum’s Mainnet, this decentralised stablecoin is uniquely collateralised with ether and is completely independent of any legal tender.
- The Terra Luna ecosystem stablecoin has steadily risen to become one of the leaders in the field, growing from $150 million to nearly $9 billion in capitalization between January and December 2021.
- Meta’s Libra project, newly named Diem, does not seem to have made much progress during the year.
II – The progressive construction of the regulatory framework applicable to crypto-assets
2021 is marked by important advances in the regulation of crypto-asset markets around the world. These initiatives are driven by the same desire: to find the balance in order to ensure the protection of users on the one hand, without hindering the flourishing of innovation on the other.
In France :
- 28 digital asset service providers (DASPs) are now registered with the AMF with the approval of the ACPR.
- The anti-money laundering and combating the financing of terrorism (AML/CFT) requirements applicable to PSANs have been strengthened: the decree of 2 April 2021 stipulates that registered or authorised service providers and issuers of tokens that have obtained AMF approval must identify their customers for each transaction.
- The National Assembly definitively adopts the 2022 Finance Bill. Three provisions, advocated by Adan, are voted in favour of the taxation of digital assets.
On the Old Continent:
- Discussions on the proposed Markets in Crypto-Assets (MiCA) Regulation are moving slowly. While the Council of the European Union adopted its position on the text on 24 November, discussions in the European Parliament are dragging on, further delaying the start of the trialogue.
- Agreement has been reached between the European Parliament and the Council of the European Union on the text of the pilot scheme for security token markets, which will remove regulatory barriers to the issuance and trading of financial instruments on blockchain networks.
- The European Commission unveils its anti-money laundering and counter-terrorist financing (AML/CFT) reform. This legislative package is composed of four texts and aims in particular to introduce the travel rule in the crypto-asset sector, and to establish a new European regulatory authority dedicated to AML/CFT (AMLA).
Outside our borders :
- Since September 7, 2021 and the entry into force of the “Lei Bitcoin“, bitcoin has become a legal currency in El Salvador.
- The ban on mining in China is leading many miners to flee to other countries. According to some sources, 20% of the world’s Bitcoin miners have remained in China (the Middle Kingdom has accounted for up to 65% of Bitcoin’s computing power).
- On 15 November, the US agrees on a bipartisan bill that includes a new tax framework for the crypto-asset sector.
- After validating the first bitcoin index fund (Proshares ETF), the SEC is postponing its decisions on two other ETFs based directly on the spot price of bitcoin.
- The US Treasury issues a report on stablecoins highlighting the need for a clear regulatory framework for them.
- The financial markets regulator, the SEC, is interested in decentralised finance protocols:
- On 3 August, Gary Gensler (SEC Chairman) explains that the legislative focus should be on crypto asset trading and lending and DeFi platforms.
- In September, the SEC opened an investigation into the Uniswap platform in order to better understand how users use the AMM (automated market maker) and the qualification of the assets it offers. As a reminder, Uniswap had already removed certain assets from its platform to better comply with regulatory requirements.
III – The continued structuring of the sector, building on the momentum of 2020
The significant development of the above-mentioned regulatory framework is leading to an ever-increasing level of confidence in the crypto-asset sector. This growing level of confidence is leading to more individuals and institutions taking an interest in the market. Thus, the structuring of the crypto-asset industry has been on an upward slope for several years with a constantly evolving market.
The crypto-asset market has experienced an unprecedented surge:
- In November 2021, the crypto-asset market crosses the record threshold of $3 trillion in capitalization.
- Over the year, more than $14 trillion worth of crypto-assets are traded around the world (almost eight times more than in 2020).
- A snapshot from June 2021 shows that 221 million people worldwide own crypto-assets, up from 106 million at the start of the half-year.
- Internationally, private equity funds are pumping $30 billion into the crypto sector.
French industry is entering the big league:
- Adan’s survey report on the state of the digital asset industry published in May 2021 reveals that 85.5% of the crypto players surveyed wish to pursue their projects in France in the coming years.
- French Tech has two unicorns in the crypto sector:
- Ledger announced that it had raised $380 million in funding. The company was valued at the time at $1.5 billion.
- Sorare completes a $680 million fundraising. The company is valued at $4.3 billion.
- In addition to these unicorns, fundraising by French players is increasing: Paraswap, Kaiko, Sheeldmarket, etc.
- Binance announces the launch of “Objectif Lune”, a $100 million investment in digital asset research in France.
- Some players are drawing the contours of “crypto-banking”: Coinhouse with its crypto passbook, BitPanda with its partnership with Lydia, Just Mining with its crypto-borrowing service, Paymium with its recurring bitcoin purchase service, etc.
The pace and means of growth in US industry remain unparalleled:
- Of the $30 billion invested in the crypto industry, $7.2 billion (almost a quarter) came from US funds.
- In July, OpenSea announced that it had raised $100 million in funding. This growing trend does not seem to be waning as on 4 January 2022, the NFT platform unveiled a new $300 million round.
- FTX raises $900 million in funding. The crypto-asset exchange platform was thus valued at $18 billion.
- NYDIG, the institutional bitcoin broker, raises $1 billion in funding: a new industry record.
IV – Innovation in the market continues to grow
The year 2021 is also synonymous with the great diversification of the crypto-asset ecosystem. If in 2009 bitcoin was the pioneer and the only one, it is now – together with other assets such as ether – the keystone of an increasingly eclectic palette.
The growth of decentralised finance (DeFi) has accelerated significantly:
- Total assets under management in decentralised finance protocols increased from USD 18 billion in 2020 to about USD 260 billion in December 2021.
- Access to DeFi is becoming more widespread: Coinbase launches a decentralised finance service (DeFi) with Compound.
- The expansion of DeFi unfortunately goes hand in hand with an increase in hacks in the DeFi sector: Polynetwork, Cream Finance, Badger DAO, etc.
- The use of Layer 2 has continued to grow due to the lack of scalability of some infrastructure blockchains: Polygon, Arbitrum, Skale.
NFTs are rapidly being adopted by traditional players and the general public:
- The number of NFTs issued continues to increase:
- According to a report by Chainalysis, in 2021, users sent at least $26.9 billion in crypto-assets to ERC-721 and ERC-1155 tokens.
- A la fin de l’année 2021, le marché du crypto-art est évalué à plus de 2 milliards de dollars.
- Record sales make headlines:
- L’œuvre numérique « EVERYDAYS : THE FIRST 5000 DAYS » de l’artiste américain Beeple a été vendue 69,3 millions de dollars par la maison d’enchères Christie’s.
- A cryptopunk (#7523) sold for $11.7 million in New York at Sotheby’s.
- Arianee raises €8 million from Bpifrance to develop its NFT product and support the digital transformation of the fashion and luxury industries.
- But the NFT market is also creating many disputes: in December 2021, the Hermès brand warned an NFT designer for imitations of its Birkin bags.
- Pascal Boyart “PBOY” puts his latest mural “The Underground Sistine Chapel” up for sale via 400 mined (issued) NFTs on the Ethereum blockchain.
- Ownest is partnering with C-Discount for supply chain traceability: every time a large or high-value package is ordered from Cdiscount, it will be traced on the Blockchain via the NFT liability trackers.
Metavers are establishing themselves as an unavoidable long-term revolution:
- TheSandbox metaverse project announces a $93 million fundraising.
- French video game company Atari has partnered with Decentraland to launch a casino in the metaverse.
- The Axie Infinity project has become one of the leaders in the field with over 2 million users per day (and growing).
- Chinese internet giant Baidu is making its first experiments in the metaverse with the launch of its XiRang project.
2022: Decisive deadlines for the sector
I – A pivotal French political year for crypto-assets
- During the French Presidency of the Council of the European Union, which began on 1 January 2022, the issues of digital sovereignty and competitiveness will be at the heart of the agenda. Adan will continue to carry the industry’s voice to anchor crypto-assets as a pillar of the European strategy.
- The French presidential elections present important issues for the future and the growing development of the French digital assets industry. Throughout the last few months, Adan has been working to include the digital assets sector in the presidential campaign debates, and to raise awareness of this new engine of the digital economy. The objective is to raise the development of the French industry as an opportunity for France, to be integrated in the roadmap of the next five years.
- The last highlight of a rich first half of the year, the French legislative elections should lead to a certain renewal of the hemicycle, and possibly of its “crypto-deputies”. Adan will have to raise awareness among the new elected officials about the problems of crypto-asset companies in France.
II – The adoption of crypto-assets is becoming increasingly widespread in France
- The growing adoption of crypto-assets is not expected to slow down in 2022: if it stands at nearly 7% in 2021, the proportion of French citizens holding crypto-assets should continue to appreciate.
- The acquisition of crypto-assets could be stimulated by the economic situation: persistent uncertainties related to COVID 19, return of high non-transitory inflation, questions about the inflection of monetary policies.
- At the same time, while they are still perceived as diversification assets, crypto-assets could nevertheless become increasingly correlated to other asset classes.
- In terms of money laundering and terrorist financing, the downward trend in BC-FT risks is expected to continue in 2021, in particular due to the increasing AML/CFT compliance of companies offering services on crypto-assets. Between 2020 and 2021, the proportion of illicit crypto-asset transactions fell from 0.34% to 0.15% of total international trade. Such dynamics will further reassure investors and authorities.
- However, other threats – mainly related to fraud and cybercrime – could undermine the democratisation of crypto-assets.
- This is why education for users, especially new investors, still seems to need to be perfected, both in terms of good practices and general knowledge of crypto-assets, which is still too biased by a number of tenacious preconceived ideas (Ponzi pyramid, equating crypto-assets with money laundering and terrorism or with an environmental disaster, etc.) Adan’s educational mission remained a fundamental focus of its action in 2022.
III – The gradual structuring of the European crypto-asset ecosystem
To remain credible and attractive, the industry will have to develop in line with the major challenges it faces:
- Benchmarking of insufficiently virtuous companies – evidenced by misappropriation of user funds, non-compliance with national schemes, market abuse (including insider trading), inadequate user protection and unfair commercial practices – is likely to increase, both at user and government level.
- In order to ensure trust in the sector and to continue to offer innovative services, players will have to anticipate and prepare for the new wave of regulation to come (notably the EU digital finance package and the LCB-FT package).
- Companies will have to complete the management and prevention of certain risks that have already been taken into account for several years, particularly in the area of AML/CFT.
- But this new year will also require apprehending and mastering the new risks – often of a technological nature – that are emerging in the crypto-asset sector, particularly in the DeFi world (smart contract hacks, oracle attacks, rug pulls, web interface attacks, asset-related risks, etc.).
- Issues related to the ecological transition and the sustainability of crypto-assets will also be a major issue for the sustainability of the digital assets market: increased institutional pressure (e.g. US Congress hearing) is added to that of civil society, and the initiatives of some regulators on mining activities (authorisations and bans) could inspire others.
- The value propositions offered by the various decentralised applications (including DeFi and unhosted wallet) will need to be enshrined so as not to be hampered by an inadequate or unworkable regulatory framework.
French regulation will guide the structuring of stakeholders in the crypto-asset markets:
- It is possible that 2022 will see a further evolution of the PSAN regime, as the authorities seem to be increasingly interested in NFT trading platforms and some of the services offered by decentralised finance projects (DeFi).
- New providers are expected to join the list of 28 registered PSANs to date.
- If the French accreditation is a tool for accelerated transition to the European regime, the first agreed PSAN could finally be established.
- In any case, the French players should start preparing for the arrival of this supranational framework. Nevertheless, 2022 will not yet mark the end of the NSP regime.
- Finally, with the reinforcement of the PSANs’ supervisory authorities’ teams enacted thanks to the Finance Bill 2022, and the creation of a national task force to fight financial scams in December 2021, we should see better supervision of the sector and increased pressure towards illegal advertising – direct or indirect (e.g. passed through an influencer), giving hope for the end of unfair competition between players.
The competitiveness of the industry across the Atlantic will remain unmatched:
- The US could widen its investment lead. In 2021, US venture capital funds allocated $7.2 billion to the crypto-asset sector.
- New major companies in the crypto-asset industry could – in the wake of Coinbase’s IPO – be listed on the stock exchange.
- The hegemony of stablecoins will be confirmed, encouraged on the one hand by certain political actors (such as Ritchie Torres), on the other hand undeterred by a Federal Reserve that has not made the digital dollar a priority. Announcements such as Paypal’s will certainly stimulate competition.
IV – The future foundations of the European crypto-asset environment: from sketch to picture
The clarification and harmonisation of European regulation should establish the conditions of confidence needed for the development of innovation:
- Debates on the proposed MiCA regulation in the European Parliament, which have stalled throughout 2021, are preventing the launch of the European trialogue which the domestic industry hopes can begin under the French Presidency of the EU Council.
- Under MiCA, the outlook for the euro stablecoin and decentralised finance ecosystem could be more or less downgraded.
- A tightening of the European AML/CFT reform project would be foreseeable, at least likely, as it would be influenced by the strict update of the FATF guidelines on 28 October 2021.
- Following the adoption of the pilot regime for security token markets in the spring, the first experiments could take place in the second half of the year.
In addition to regulatory issues, the institutional landscape should confirm its (slow) change:
- The European Central Bank’s (ECB) investigations into the issuance of a digital euro, which began in October 2021, will continue throughout the year.
- At the same time, the questions and concerns of the banking system regarding the transition to the digital euro are likely to increase.
- The Banque de France will continue to conduct its own experiments in collaboration with other players in traditional finance and the crypto-asset sector.
In parallel to the European work, institutionalisation within the other major regions of the world will continue according to their own priorities:
- Following the FATF guidelines issued in October, several states – such as North Korea and Estonia recently – have already indicated that they want to be inspired by them and could lead the way in adopting drastic measures towards decentralised finance protocols.
- The Chinese state’s slingshot towards crypto asset acquisition and mining may yet intensify, as bitcoin adoption flourishes and the digital yuan is rolled out.
- 2022 should be a decisive year for this e-yuan, especially in view of the Winter Olympics.
- Other central banks, such as Mexico, may accelerate their central bank digital currency (CBDC) projects.
- Other states (notably in South America and Africa) could legislate, as El Salvador has done, to adopt bitcoin as legal tender.
- The US, which is increasingly interested in stablecoins and decentralised finance, could explore the idea of issuing a specific regulatory framework for the crypto-asset sector.
V – The increased interconnection of crypto-asset companies and other economic agents
“Banking” of the French crypto-asset ecosystem? 2022 could be the baptism of fire for the first credit institutions:
- The first real and assumed offering of banking services (accounts, credit, payment, financing) to the crypto ecosystem should be launched.
- New banking services linked to crypto-assets are expected to emerge, for example by integrating them into savings or investment products, into the portfolios of certain clients, by providing advice to their customers, etc.
- The first acquisitions of start-ups specialising in the sector could help these ambitions, following the example of PayPal which, on 8 March 2021, acquired the Israeli digital asset security provider Curv. This collaboration will allow PayPal to develop its own stablecoin.
Traditional players will seize the business opportunities associated with supporting crypto companies and innovating their businesses using crypto-assets:
- The establishment of the European pilot regime for security token markets should galvanise cross-industry partnerships (notably with MTF operators and Central Securities Depositories).
- The work carried out by insurers to cover the professional liability risks of crypto-asset service providers will continue. A specific insurance offer for these players could emerge.
- The new year could also see the emergence of new French hedge funds investing in crypto companies, including in tokens.
- Following the example of some precursors (e.g. Airbnb), the acceptance of crypto-assets as a means of payment for traditional services could spread.
- Brands and the commercial world in general will be increasingly interested in the development of NFTs and metavers, identified as opportunities to strengthen their identity, community, and deepen the digital experience of their customers. The competition between the GAFAMs to be the leader in digital scarcity and virtual worlds could intensify considerably. The first signs of competition between these players have already materialised.
- Within any type of industry, new collaborations could arise between crypto and incumbent players, such as the one between Ubisoft and Sorare in 2021 in the video game sector. These synergies – between established companies and their challengers – could also involve the art sector, sports, entertainment, real estate and more.
Notable advances by crypto players in the field of traditional banking and finance
- New “crypto-banks” could emerge offering their customers crypto-asset services similar to traditional services.
- Digital asset service providers (DASPs) could move into other statuses, such as e-money issuer or payment service provider.
- New bitcoin ETFs, including those with direct exposure to the bitcoin spot price, could be launched.
- The proliferation and increasing resilience of decentralised finance (DeFi) players should increasingly attract customers from equivalent centralised services.
VI – The potential of innovation and all its promises
In 2022, technical progress in the crypto-asset sector is expected to continue to drive crypto into a major innovation sector.
The great revolutions of 2021 will not be a mere fad:
- The development of Web 3 services will continue, with major upgrades planned for many decentralised finance protocols, including Aave. The implementation of services dedicated to institutions will certainly develop.
- As the metaverse continues its meteoric rise in 2021, many companies – like Meta – may transition to a virtual world.
- The NFT market will continue to expand with concrete applications in the fields of entertainment, video games, art and luxury. The use of physical NFT (representation of a physical object) could become more recurrent.
Efforts to improve infrastructure will not be in vain:
- Improvements to the Bitcoin network are planned. The second or even third layer protocol RGB – which will allow the issuance of new scalable and privacy-protecting smart contracts – could be deployed for good. The launch of V2 of Stratum, one of the largest mining pools on the Bitcoin network, is also expected. The aim of this new version of Stratum is to improve data transfer, reduce the cost of physical infrastructure for mining operations and improve network security. Finally, proposals for improvements to the Bitcoin network are already under consideration:
- The BIP 118, dependent on the Taproot update, which will create a new type of key more suitable for off-chain protocols.
- BIP 119, which will regulate how a bitcoin is spent.
- Improvements to the Ethereum network are also planned. The change of consensus protocol on Ethereum (“The Merge”) should bring solutions to the two major pitfalls of the network, by improving the scalability of the network and reducing the energy cost of the protocol. However, this historic upgrade of the network is far from being a done deal, and it will be important to remain vigilant for implementation delays and unexpected difficulties that the ecosystem may encounter as a result of this transition.
- Other technical increments are to be expected:
- The scalability issues of the various networks will be further mitigated via sidechain, Layer 2 and ZK-proof integration (e.g. via Starksync and Starknet protocols).
- The new infrastructure blockchains (Polkadot, Solana, Terra, Avalanche, etc.) could continue to offer an alternative to Ethereum and foster innovation in the sector.
- The interoperability of infrastructure blockchains should be further improved by cross-chain bridges and atomic swaps between different blockchains.
- The use of decentralised insurance will – according to several estimates – be more recurrent.
- The governance of decentralised finance protocols will become an increasingly important issue as these protocols and their communities continue to grow.