Moving on from crypto's catastrophic 2022

Insight

Published

25 January 2023

The global crypto market has fallen by over $2 trillion in the last 12 months.

The value of the entire cryptocurrency market reached a peak of $3tn in 2021 but collapsed shortly after in 2022, due to a combination of corporate governance issues and broader macroeconomic events. The total value of the global crypto market currently stands at about $1 trillion.

Since many crypto firms are unregulated, corporate governance tends to be a low priority on their agenda. One of the consequences of this has been the failure of FTX, one of the largest cryptocurrency exchanges. The crisis has had a significant impact on the rest of the crypto industry, with the crypto lender BlockFi and its peers Voyager Digital and Celsius Network, all filing for Chapter 11, the extent of the damage is still unclear.

As a result, the digital asset centralised finance sector (CeFi) will face increased regulation in the future. In the absence of sufficient regulation, the cryptocurrency market will struggle to gain the acceptance it needs from institutional investors to succeed.

Auditors, accountants and lawyers face increased scrutiny in 2023. For example, FTX’s 2021 financial results had been audited by Armanino and Prager Metis, however, a report published earlier in the year from the Public Company Accounting Oversight Board (PCAOB) found deficiencies across all four audits conducted by Prager Metis.

The White House recently released its first-ever comprehensive framework for the responsible development of digital assets. The framework includes recommendations to protect consumers, investors, businesses, national security and financial stability.

Other recent regulatory advances include the release of the Markets in Crypto Assets (MiCA), a provisional agreement aiming to establish a regulatory framework for crypto-asset services across the EU.  Meanwhile in the UK, the treasury is finalising plans for a set of new rules to regulate the industry – the rules would allow the FCA to supervise crypto more broadly and monitor how firms operate and advertise their products.

Some institutional investors such as BlackRock still believe the technology behind crypto is relevant for the future. The BlackRock CEO Larry Fink said he believes the next generation for markets will be tokenisation of securities.

While 2022 was a challenging year for the Digital Asset sector, this downturn will bring opportunities for London, Bermuda and International insurers who continue to take a leading role in this sector. We have been successful in securing insurances for a number of leading exchanges, liquidity providers, lenders and blockchain infrastructure companies, which demonstrates that despite recent events Howden and International insurers continue to be able to provide innovative solutions.

When it comes to insuring crypto risks, it’s clearly vitally important to partner with a specialist broker – such as Howden - who understand this complex and rapidly evolving landscape.  If you would like to discuss your insurance requirements, please contact Freddie Palmer.