Digital Assets Update, 3Q22: The Great Cleansing
- 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
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.
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