Looking back over 2022, we got a reality check after a strong 2021. As the year progressed, there were numerous challenges. Much of CeFi got a wake-up call as leverage, collateral, and incentive rates came back to reality.
Yet, in spite of the difficulty, much of the core infrastructure of crypto continued to operate. Building and investment continued throughout.
Pamela Draper, President and CEO of Bitvo, and Bitvo’s Institutional OTC trader Joel Johnson sat down to reflect on a wild 2022 and what might be in store for the year ahead.
In this interview, we cover the following:
- Trends in crypto for next year
- Themes that got lost in the news of 2022
- Lessons for traders
- The anticipated evolution of regulation
- The challenges regulators face
- Where crypto fits into an evolving economic environment
- The impact of 2022 on institutions
- What’s on its way to page one
- What’s in store for Bitvo for 2023
Tristram: Pam, Joel, great to get together again this time of year and reflect on the year that was and the one that’s coming.
Pam: Yes. Things have finally calmed down a bit now after all the craziness around FTX. Obviously, some hectic weeks there.
Joel: Good to be here.
Well, it’s gotta be good to get that out of the way for the time being.
Pam: Yes, absolutely unbelievable.
I had to look back to 2020 and 2021 to see which of the last three years was the craziest. Do you think 2022 is the craziest year in crypto to date?
Pam: I think it has to be.
Joel: Agreed.
So let’s talk about trends heading into 2023. What do you view as the most significant themes coming out of crypto in 2022 heading into 2023?
Pam: Well, we’ve had a lot of blowups this year, with FTX being the most recent. Unfortunately, they probably won’t be the last. So one theme will be a focus on regulation. And by regulation, there will be talk around why regulation has not been brought on faster and that most governments still don’t have a really well-defined crypto regulatory regime.
Another theme that stands out is that even in a sustained bear market, a lot of companies have continued to build. This is something that has been overshadowed by all the bad news out there this year. We’ve seen a lot of development, particularly in the DeFi space, that will come to fruition as markets rebound.
Joel: The FTX fiasco spooked a lot of people, so I agree with Pam on regulation being a core theme heading into next year.
What are some themes that may have been lost in the chaos of the last year?
Pam: This has been an event-driven year, which has overshadowed everything else. But all the development that’s taking place seems almost like it’s under the radar. I think that when everyone moves on from the challenges of 2022, there’ll be all this new infrastructure ready to go.
Another point worth mentioning is that during a bear market, you have to shift your focus a bit, especially with crypto. You have to take a break from the chat rooms, especially those focused on trading. This is the time to be focused on the technology instead. That way, you can stay up with the progress being made and the problems that will be solved going forward.
Having said that, what didn’t happen was none of the main core projects blew up. They just continued on, and all this activity was taking place around them. So there’s still bitcoin. There’s still ether. Cardano continues and so on. It’s a vote of confidence for the core infrastructure.
Joel: For me, the biggest thing, especially recently, is the promotion of self-custody. It’s a benefit that not enough people have taken advantage of this year. The other thing that comes to mind is the importance of proof of reserves, which as a trading platform, is crucial.
Pam: That’s bang on. A real focus on back-to-basics like security and custody. So not just talk, but proof that you’re walking the walk.
If you look at the bankruptcy filing for Celsius, in particular, and any of the other big blowups, self-custody was not used to the extent that it should have been.
This was one lesson for traders this year. Are there some that you’d like to highlight?
Pam: While self-custody is a big one, the other part of that is ensuring that you know where your assets are held and how they’re being held if you are using a custodian. At Bitvo, for example, we use BitGo for custody of client assets. BitGo is a qualified custodian as defined by their regulators and BitGo Trust, which Bitvo uses for cold storage, is a registered trust company. This status is based on the policies and procedures they have in place, including SOC2 reports verifying necessary controls and segregation of customer assets.
Joel: I agree with Pam. Traders should use self-custody and always carefully vet the trading platform or exchange they are using. Knowing exactly where your assets are being held is the big story of 2022.
Pam: The old adage about if it’s too good to be true was on full display this year too. These big promises of double-digit returns on passive staking and lending were clearly problematic and unsustainable. Unusually high returns like this are more of a warning than an opportunity, as we saw repeatedly this year.
2021 was a year where price chasing was the norm, and the market seemed like a ghost town during declines. How would you describe this year?
Pam: Flows are well off across the entire industry compared to 2021, which is to be expected given the nature of events. Having said that, we’ve actually seen an uptick following FTX which we attribute to the comfort traders feel using a regulated trading platform like Bitvo in the current environment.
You touched on regulation earlier in our chat. Obviously, it’s continuing to evolve. What are you expecting for 2023?
Pam: In Canada, we currently have a pretty well-defined regulatory regime. So we have a little bit of certainty there because we’ve already licensed under that regulatory standard. I think what you’ll see is other governments moving to catch up to where Canada already is. You’ll likely see these other regulators in a rush to try to prevent some of these massive blowups that have affected consumers this year.
But even in Canada, while regulators told us and every other platform that we all need to register and become restricted dealers and report to the CSA and or IIROC, there are other platforms that haven’t done that. Yet they are still operating. And then and if you look at other international jurisdictions, several don’t have any crypto regulatory framework at all. We expect 2022 will be the catalyst for this whole process to get going in 2023.
Joel: From our perspective as a Canadian trading platform, we believe the regulatory standards here in Canada are an advantage for cryptocurrency users, enthusiasts and traders.
Is there any concern about over-regulating in reaction to the events of this year?
Pam: Canada has a defined program which is helpful in comparison to other jurisdictions. We have raised directly with regulators the aspects of the regulatory regime that, in our view, don’t make sense, as well as things that we’d like to change. Sure, there’s always a risk of over-regulating. But that’s not really the experience so far. If anything, it’s surprising how slow many governments have been to put in place any substantive regulation.
What is holding them back at this point?
Pam: Regulators have a number of challenges. My impression is that globally, like in Canada, they are understaffed. So having a regulatory regime is one thing, but then you have to be able to enforce it, and that takes resources. In addition, there seems to be some caution around getting it wrong. Crypto is evolving so fast that the learning curve is daunting at times. And without this learning, it’s hard to put something viable forward when they always feel like they’re behind.
We spent a lot of time with the CSA, the ASC, and IIROC after launched in 2018, long before the regulatory regime was put in place here. The process is ongoing from an educational perspective. From starting in 2018, and there were some platforms that began before us, initial regulation only became a reality in 2021-2022.
The economic environment has been almost as wild as crypto in some ways. Where does crypto fit in coming into 2023?
Pam: Historically, crypto has been fairly uncorrelated to the rest of the financial markets and has done its own thing. But in 2022, it’s had a tighter correlation with stock markets, particularly the tech-heavy NASDAQ. Tech has traded more like a risk asset this year, and crypto, along with it, at different times. Earlier in December, something changed in crypto. It seems like the perception is that most of the surprises are behind us while financial markets are trading based on worries about interest rates and a potential recession into 2023.
Crypto was supposed to be an uncorrelated asset, but sometimes it has behaved like that and sometimes it hasn’t. The original narrative was that it was a hedge or a form of counter asset compared to fiat money. 2023 has a lot of uncertainty from an economic standpoint, including interest rates, oil prices, and inflation uncertainty, as well as uncertainty around the war in Eurasia. So the question is, will crypto trade as a risk asset in 2023 like it did this year? How will the relationship with financial markets continue to evolve? We will see…
Joel: I agree with Pam’s thoughts here.
How are institutions responding to the events of this year?
Pam: I think institutions will have a mixed response. For those who were considering getting into it or early in their crypto involvement, this will represent a setback. The impact on Ontario Teachers Pension Fund due to FTX and the hit the Caisse took on Celsius are very public losses. I would anticipate that getting crypto-related transactions approved by institutions, boards, and risk committees will be more difficult in the short term. But having said that, these events will precipitate faster and more comprehensive regulation. The outcome of this regulation will increase the comfort of traditional institutions investing in the space. A clear regulatory regime eliminates uncertainty around the asset class, as well as the uncertainty around the direction of regulation itself.
Another group of institutions is looking at the situation as an opportunity. There will be lots of distressed assets available for savvy investors with insight and cash. This means institutions like Goldman Sachs and Blackrock, amongst others. Goldman has already announced that they are looking for assets to add to their portfolio at favorable valuations.
What is something nobody is talking about that would be important to pay attention to in the upcoming year? The old Don Coxe concept of the story on page six on its way to page one.
Pam: I always liked the page six to page one idea. I really liked his writing. Excellent. Some of the DeFi stuff that’s been under the radar this year would be candidates. It will be interesting to see how that plugs in and interacts with the greater crypto financial ecosystem. I’m curious to see how the relationship between traditional finance and crypto evolves in the coming year. A good balance between two co-existing ecosystems would be great for consumers and consumer choice.
Joel: Crypto payments and the increasing use of stablecoins for payments have been quietly building momentum. The infrastructure developments here set the stage for a greater crypto payment presence at businesses in the years ahead. And as we’ve talked about frequently, regulation will play a key role here as well.
What’s in store for Bitvo in 2023?
Pam: This year, we were focused on a transaction that ultimately didn’t happen. As it turns out, that was a good thing. With that behind us, we are focused on continuing to build out the platform. Throughout, our mission remains unchanged. We are positioned for an expanding regulatory environment and will be adding more crypto assets to our listings for current and future clients. And we are continuing to add tech improvements to the platform throughout the bear period. We plan to be the leader coming out of the bear phase into the next bull phase of crypto.
Terrific! Nice to get together for a chat and get your thoughts.
Pam: Thanks. You too.
Joel: Thank you.
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