Crypto Trends Into Q2

Turbulence in the crypto industry in 2022 left many guessing as to what was in store for 2023. Looking back over the past year, there are many lessons to be learned and insights to be gained. The first month of 2023 has also provided a clearer picture of what we should expect in the near to mid future.

As we continue to move through 2023, there are some key industry trends that we expect to develop into Q2. We anticipate that these trends will help shape the crypto industry into a more secure and efficient space for both institutional and retail investors in the future.

Blockchain credentialing

Credentialing as a service (CaaS), and more broadly blockchain credentialing, was a growing conversation in 2022 that will be amplified in 2023. The idea of creating a digital identity (dID) is not just emerging in crypto, but also in the traditional space. Since the enactment of the Digital Economy Act in 2017, the United Kingdom has opened the door for improving methods of identity verification. At the start of 2023, the U.K. Data Sharing Legislation Team created an open consultation for draft legislation to support digital identity verification for public applications.

Similar to the U.K.’s system of decentralized credentialing, the world of Web3 started to emerge with on-chain credentials to ensure a more transparent, trustless system for decentralized identities. On-chain credentials allow users to showcase digital identity and credibly engage with protocols as anonymous individuals. Most commonly NFTs, on-chain credentials currently provide an identity method or proof of a completed action. For example, Ethereum Name Service (ENS), a distributed, open and extensible naming system, has been used to provide an identity for an otherwise anonymous individual.

In a move to make on-chain credentials non-transferable, the concept of Soulbound tokens has risen in popularity as a way to provide further, non transferable information about individual wallet holders. Soulbound tokens were conceptualized by Ethereum co-founder Vitalik Buterin in the co-authored paper “Decentralized Society: Finding Web3’s Soul.” In the paper, the authors describe soulbound tokens (or SBTs) as non-transferable NFTs that represent a social identity and experiences in a decentralized society.

Soulbound tokens and other forms of on-chain credentials are on track to create a trustless system for handling sensitive data that bridges traditional spaces and Web3. Last month, Ethereum scaling solution zkSync integrated the on-chain, digital identity solution RNS.ID, offering an on-chain privacy solution for verifying government IDs through zero-knowledge proofs. RNS’s ID solution has already been implemented as the digital identity platform for the island nation Palau and Buenos Aires, Argentina.

Bridging traditional finance and the digital assets space, platforms have started to develop soulbound tokens to seamlessly transfer KYC credentials for CeFi and DeFi transfers. In September, Binance announced that it would issue soulbound tokens to all BNB blockchain users, allowing users to access permissioned DeFi without having to continuously reshare sensitive information.

BCB Group operates on a “regulation first” principle. We believe that the advancement of blockchain credentialing will help further support the needs of institutional clients to enter crypto and maintain the safety of the crypto industry.

As this space continues to evolve, we expect that this solution becomes standard among both retail and institutional users.

Regulation and compliance

In the words of Ron Hammond, director of government relations at the Blockchain Association, “nothing spurs legislation like a crisis.”

The spectacular fallout of the crypto exchange FTX has undoubtedly captured the attention of regulators who were already becoming more actively involved in the industry. U.S. Representative Jim Himes previously told CoinDesk that “the collapse of FTX definitely has an impact on the way people in Congress think about this.”

The collapse of FTX and the actions of other bad actors have led to an increase in compliance requirements, with some countries introducing new laws and regulations to protect investors. However, the movement toward regulation was ongoing throughout most of 2022.

In December, Brazil passed landmark crypto regulation that provides clear definitions surrounding digital assets and safeguards around money laundering and fraud. Europe approved the Markets in Crypto Asset Regulation (MiCA) framework, which broadly covers topics like anti-money laundering and stablecoins.

As the industry moves into 2023, we can anticipate more regulation on the horizon. Those who have stayed grounded in compliance will brave this crypto winter into 2023 and be prepared for legislation to come. For others, the start of the year will be an important transition toward compliance and rethinking operational approaches.

While the past year certainly changed the landscape of the industry, there are still countless opportunities for projects to continue to build and support the mainstream adoption of crypto assets. Most opportunities lie with those looking to operate in a secure way.

BCB Group champions good and effective regulation for the industry, with licensed entities in the U.K. (API) and Switzerland (VQF). The firm is seeking to further expand its tier 1 regulatory license footprint this year, with the addition of a French EMI and DASP license to its portfolio. By focusing on compliance standards that meet strict, international regulatory standards, BCB Group treats compliance as a feature of quality and our competitive advantage, rather than a threat. While others in the TradFi space look to decrease or remove their banking exposure to crypto firms post-FTX, BCB Group continues to pursue its unwavering dedication to this highly innovative sector.

Security in custody

In line with regulatory compliance, we will likely see the crypto industry reward projects and companies looking to build secure, innovative solutions. According to a recent report, 2022 was one of the worst years on record for stolen funds, with around $3 billion in crypto assets lost due to hacks and exploits alone. One-time audits and opaque security practices are coming to light, and the ongoing exploits have pushed users to seek more secure ways to store their crypto.

While proof of reserves quickly rose to favor after the FTX collapse, accountability through improved security will be one of the biggest trends in 2023. A return to greater control over assets and a robust, compliant security solution will be the catalyst for new CeFi and DeFi players to establish themselves and existing companies to retain their users.

In addition to building out a robust security program, investments in new methods of security will further make security in custody a top trend in 2023. We’ve already started to see this trend develop with multiparty computation (MPC).

MPC technology has a broad range of applications across technology and security, but has recently become an emerging way to secure cryptocurrency. Unlike traditional self-custody solutions like cold or hot storage wallets, MPC wallets are keyless. Unlike a traditional wallet, where a user generates a private key that signs transactions, MPC wallets generate private keys by aggregating encrypted key shards to eliminate key-person risk and increase control.

Projects like Cypherrock, Fordefi, MPCH Labs and Particle Network raised funds in the last half of 2022 to develop MPC-powered crypto solutions. Fireblocks, which was given an $8 billion valuation following its Series E funding round last January, recently received the Cryptocurrency Security Standard (CCSS) certification, making it the first company to meet the certificate’s requirements.

Like others in the industry, BCB Group is currently developing new custody infrastructure based on hardware security models (HSMs). HSMs are physical computing devices that provide cryptographic protection over private keys. By implementing new HSM infrastructure, BCB Group is providing an additional, offline layer of security to its user’s assets to ensure the continued safety from bad actors.

As the market moves into 2023, we expect to see a high emphasis on security among both CeFi and DeFi players, as well as investments being made for new technologies to better help protect digital assets.