Digital Assets Update, 4Q22: As policy tightens

High inflation and interest rates have sapped the momentum in the sector’s valuation, and some concerning governance cases have emerged, but innovations continue apace.
Group Research, Taimur Baig, Nathan Chow, Ma Tieying, Samuel Tse22 Sep 2022
  • From NFT to commerce in web3, new use cases keep emerging
  • Sharp valuation loss notwithstanding, blockchain based applications are flourishing
  • New crypto exchanges, backed by well-established brokers, are being set up
  • Regulatory developments have picked up pace
  • CBDCs trials are getting close to real world use both in EM and DM
Photo credit: AFP Photo

The end of the easy money era has had a negative impact on risk assets, not sparing the digital world. Despite a few false dawns when the markets excepted inflation and policy rates to peak soon, it has been a difficult environment for stocks, bonds, credit, and even commodities. As the global economy and markets settle down for a higher-rates-for-longer narrative, digital assets have felt the chill acutely.

This has been particularly the case for private digital currencies. Like gold, which yields zero, digital currencies have found their attractiveness challenged by sharply rising nominal and real yields on safe assets like the US treasury. A substantial increase in correlation between the US stock market and bitcoin this year is an illustration of the risk-off sentiment. Crypto sentiments have also been hurt by economic slowdown worldwide, regulatory crackdowns, crypto fund failures, and some high-profile governance issues. As liquidity tightens and regulatory oversight increases, the exuberance seen in the sector in recent years is unlikely to return soon.

But innovations and ideas are by no means exhausted, even as fund raising becomes more challenging. Whether it is speculation over NFTs or commerce in web3, blockchain based payments solutions or addressing the energy usage of the Ethereum network, work continues unabated at the digital space. Blockchain-based games have exploded in south-east Asia, with the rest of the world taking note. A group comprising of some of the largest brokers in the US is backing a new crypto exchange called EDX Markets, aimed at safe and speedy trading of digital assets for US retail and institutional investors.

On the multilateral side, work on a framework for capital rules that covers banks wanting to hold and trade digital assets on behalf of customers is progressing, and likely to be finalised by the end of the year, as per the Bank for International Settlements. Central banks around the world continue to make progress in thinking through CBDCs’ role in facilitating monetary policy, financial inclusion, and cross-border trading of good and currencies.

In this quarterly update, we look at the latest market data on crypto valuation and usage, as well as regulatory developments. A crypto winter notwithstanding, digital assets remain a hotbed of activity.

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Taimur Baig, Ph.D.

Chief Economist - Global

Nathan Chow 周洪禮

Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港

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