As 2022 rolls in, it often feels like the only sensible thing to predict is unpredictability. However, encouraged by some of our accurate predictions for 2021, the Freshfields Fintech team has again decided to crowdsource its expectations for the year ahead. This post focuses on what 2022 holds for the cryptosphere – check out our separate posts on fintech sector growth and regulatory developments.
Daniel: NFTs, DeFi, metaverse will mainstream crypto – cryptoassets were the talk of the town in 2021, and at times it seemed the whole world was joining the crypto-revolution. Trading bitcoin is becoming (almost) as mainstream as trading in shares, as more and more banks and fintechs integrate crypto-trading into their offerings. It may not seem possible, but we predict the cryptosphere will attract even more focus in 2022, even if (or perhaps as a result of) crypto prices failing to maintain their historic upward trajectory.
Much of the attention will be on use-cases for crypto beyond pure speculative trading: while the use of non-fungible tokens (NFTs) is primarily limited to the art sector, NFTs’ full potential will be further explored by market participants in 2022 (see further below), efforts to monetise the metaverse could see crypto take a key role, and the growing number of investors holding cryptocurrencies could also spur demand for new ways to generate returns. Absent any regulatory crackdown, this trend looks likely to pave the way for more widespread use of DeFi (decentralised finance) applications. The DeFi area is rapidly growing in popularity and sophistication, and the opportunities and risks of this emerging trend are becoming increasingly apparent. Don’t expect regulators to watch from the sidelines for long.
Tom: NFTs meet a crossroads – to continue the theme, if 2021 was the breakout year for the NFT then perhaps 2022 will be the year they go mainstream. The prevalence of NFTs and the eye-catching sums for which some NFTs are being sold will likely lead to increased focus on the risk and potential limitations of NFTs as we move into 2022. As far as the UK’s FCA is concerned, NFTs are unregulated utility tokens for which purchasers have no financial regulatory protections. Under English intellectual property law, an NFT purporting to record ownership of a digital asset does not effect any actual transfer of the IP in the relevant digital asset. Also, while each NFT is unique, there is no limit on the number of NFTs that can be issued by a person or organisation – each of which could relate to the same underlying asset.
As regulators grapple with NFTs, greater numbers of organisations, including businesses, sports clubs and popular bands will use 2022 to issue NFTs to paying customers or fans. Even in the absence of financial regulation, scrutiny from advertising authorities, consumer protection bodies and the media is likely to intensify as to what purchasers are actually receiving in return for their money. Lessons learned from the initial coin offering boom of a few years ago would also suggest that NFTs will become an increasing target or tool for unscrupulous actors. Organisations should be wary of who they are partnering with in the NFT-space.
Eva: Crypto vs. the authorities – the EU’s comprehensive cryptoasset framework is getting ever closer to adoption. This new regulatory regime – including a regulation on cryptoasset markets, a regulation on a DLT market infrastructure regime and amendments to existing financial markets rules – will represent a step change for the European crypto industry.
Further tension comes from the evolving relationship between cryptoassets, stablecoins, digitised ‘traditional’ payment rails and central bank digital currencies (CBDCs) (check out our recent post). Many central banks across the globe are currently looking into CBDC as a ‘crypto-hedge’ or even a ‘crypto-killer’, with the People’s Bank of China, the US Federal Reserve, the Bank of England and the European Central Bank all at vastly different stages of the development cycle.
Brock: US category competition – fintechs around the world will be paying close attention to the United States, where 2022 will see an escalation in debates about how to define various cryptoassets from a regulatory perspective, and how to categorise the activities related to them. Parsing tokens into securities, commodities (or both), derivatives, currencies, or none of the above, will have significant implications for the regulatory regimes applicable to activities involving such assets. Regulators such as the SEC, CFTC, OCC and Fed are all likely to wade into the debate, as a growing crypto market size and velocity of trading activities heightens the sense of urgency to assert regulatory authority. Yet, in the absence of legislative clarifications, regulators look likely to become more assertive in defining the space through administrative actions and varying degrees of regulatory guidance and rule-making. Such non-legislative action is likely to create greater complexity in the short term for entities working to navigate overlapping regulatory spheres.
Claire, John: UK regulators prioritise stablecoins and promotions – whilst the EU is taking the approach of a wholesale regulatory regime for currently-unregulated cryptoassets, the UK is still considering its position. Based on the consultations taking place in 2021, in 2022 we expect to see final proposals for the full regulation of business connected to stablecoins and the extension of the existing financial promotion regime to unregulated cryptoassets (including bitcoin and ethereum but not, according to HM Treasury’s consultation paper, NFTs). Our sense is that this would be welcomed by the industry but the devil will be in the detail.