Digital Assets Update, 3Q22: The Great Cleansing

The digital currency and finance space has gone through tumultuous events during 2Q, including stable coin runs. The sector is beset with macro stress, and yet innovations continue apace.
Taimur Baig, Chang Wei Liang, Sachin Mittal, Radhika Rao, Duncan Tan09 Jun 2022
  • Private digital currency valuation has declined by over a trillion dollars this year…
  • ...but thankfully without any financial stability risk manifestation so far
  • Regulators are concerned about crypto asset leverage and crypto lending becoming more risky
  • On CBDCs, there is continued interest and explorations, especially in developing economies
  • We examine how digital transactions are the key conduit between physical and online in the metaverse
Photo credit: Adobe Stock Photo

Introduction: The Great Cleansing

US Federal Reserve’s monetary policy cycle has created havoc in the digital finance space. Rising interest rates and strengthening of the US dollar have been major headwinds for risk assets in a general and non-USD assets in particular. Tighter liquidity conditions and broad-based risk aversion have combined to add stress to the financial architecture around digital assets. Private digital currency valuation has declined by over a trillion dollars this year, a dramatic adjustment, but thankfully without any financial stability risk manifestation so far.  

Around the selloff, there has also been regulatory concerns about crypto asset leverage and crypto lending becoming more risky, complex, and interconnected with traditional financial institutions.

Critics often assert that crypto assets are a solution looking for a problem, but the war in Ukraine showed a use case. The beleaguered government of Ukraine solicitated, and received, tens of millions of dollars in donations in cryptocurrencies. At the other end of the spectrum, no major reports have surfaced about Russia using crypto assets to evade Western sanctions, although a Russian government official was recently quoted stating that using digital currencies in transactions for international settlements was being actively discussed.

The sharp selloff and some adverse events of this year may well cause a cleansing of the sector, with some frothy valuations coming down to realistic levels and investors finally being able to differentiate among a wide spectrum of concepts and products.

In this update, we go over the tumultuous events that took place during 2Q, including the stable coin runs. We then take stock of the numerous developments at the central bank digital currency space. We conclude with a special section, “Metaverse: Why We Should Care.” Truly, the topic of the moment in the digital space, with virtually all major tech platforms investing billions in developing the infrastructure and services for in this new frontier.  We examine the tantalising possibilities.

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - Global

Chang Wei Liang

FX & Credit Strategist, Global

Sachin Mittal

Industry Specialist

Radhika Rao

Senior Economist – Eurozone, India, Indonesia

Duncan Tan

Rates Strategist - Asia

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here

GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).  This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.