How a big, messy 'cleanup' in crypto could pave way for a more regulated, mature market in 2024

By Frances Yue

After what industry participants are calling a big, messy "cleanup" of the digital asset industry, crypto bulls are hopeful that the fledgling space will be anchored by more established, regulated players in 2024.

Crypto investors may end up remembering 2023 as the year of the conviction of Sam Bankman-Fried, co-founder of bankrupt crypto exchange FTX, and his multibillion-dollar fraud. Or for the $4.3 billion fine and plea deal involving Changpeng Zhao, "CZ," co-founder of the world's largest crypto exchange Binance.

It also was the year when a number of the world's largest asset managers, including BlackRock, (BLK) Fidelity and Invesco (IVZ) filed applications for exchange-traded funds that invest directly in bitcoin.

The highs and lows of a tumultuous year could both prove pivotal to the crypto industry, especially with participants expecting the new suite of ETF products to be soon approved by regulators, which could bring in heavy institutional inflows. It could also signal a changing of the guards.

Lifted by such excitement, bitcoin (BTCUSD) has rallied dramatically in 2023, with an over 150% gain year-to-date, according to CoinDesk data. The crypto was trading above $42,000 on Friday, although still more than 35% below its record high in 2021.

In another green shoot, some in the industry see the year's rally as mostly driven by financial institutions, with individual investors more sidelined by the collapse of several big crypto exchanges and lenders in 2022 and 2023.

Diogo Mónica, co-Founder and president of crypto custodian Anchorage Digital, characterized this year as the first institutions-driven bull market in crypto's history, as evidenced by transactions on his platform.

Still, others see a slightly different story unfolding, with the recent rally of meme coins potentially pointing to optimism among individuals still hoping to strike it rich with less established digital assets. Dogecoin (DOGEUSD) rallied almost 30% during the last 30 days, while Shiba Inu (SHIBUSD) rose over 10% for the same period, according to CoinDesk data. Meme coin Bonk jumped 100% over the past seven days and over 700% over the past 30 days, according to data from CoinGecko.

"Who is buying these coins? It might show that retail interests are coming back," said Abraham Chaibi, co-founder at digital asset trading firm Dexterity Capital.

What's next?

In the past year, the U.S. Securities and Exchange Commission shut down crypto exchange Kraken's staking services in the U.S., and charged Coinbase (COIN) with operating an unregistered national securities exchange, brokerage and clearing agency, while the crypto platform denied such claims.

In November, Bankman-Fried was found guilty on all seven counts of fraud charges. In the same month, Zhao pleaded guilty to a criminal charge of violating the U.S. bank secrecy act, and agreed to step down as head of the Binance, as part of a broad settlement with U.S. authorities. The plea deal was accompanied by a $4.3 billion fine on Binance.

"It reminds me a little bit of previous cleanups," said Matt Hougan, chief investment officer at Bitwise Asset Management. In 2014, Mt. Gox, arguably the biggest crypto exchange, at the time, collapsed after being hacked. "But from its ashes rose custodians like Fidelity Digital Assets, BitGo and Coinbase Institutional," Hougan said in a call.

Hougan said he's hopeful that more regulated players will rise into prominence after the recent "cleanup" in the industry.

After Zhao's plea deal, Binance is likely to remain as an important player, but not as significant as it used to be, Hougan said. "I think it's unlikely that they will play the role in this next cycle that they played in the past two. The role of the leading crypto exchange will likely be played by Coinbase and potentially by another player globally," Hougan said.

Hougan expects the crypto market to see a bifurcation in the future, with the trading activity of large-cap crypto, such as bitcoin and ether, mostly dominated by big, regulated companies, and that of smaller tokens mostly happening on decentralized platforms.

Wall Street firms could play a special role in the digital asset industry, as they have a customer base that may want exposure to crypto, but don't want to jump through regulatory hoops, said Peter Eberle, president and chief investment officer at Castle Funds.

Still, as the crypto industry expands, "the pie gets bigger," Eberle said. "It's not a zero-sum game where if they do well, crypto firms don't do well," Eberle noted.

The potential approval of bitcoin ETFs also could push the crypto industry into the right direction, according to Samir Kerbage, chief investment officer at crypto asset manager Hashdex.

"Because a lot of the service providers would need to comply with how those ETFs operate, and that's going to be a huge business. That's going to shepherd the ecosystem in the right way when it comes to market structure," Kerbage said.

Next in Year Ahead: Investors kissed the era of cheap money goodbye. Now what?

-Frances Yue

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12-18-23 0730ET

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