What beckons for the crypto-economy in 2022

2021 was a watershed year for cryptocurrencies in many ways. For one, El Salvador adopted Bitcoin as legal tender in September, essentially becoming the first sovereign entity to legalise and sanction Bitcoin as the currency of choice. Non-fungible tokens (NFTs) have also undergone 'mainstreaming' with high-profile celebrities (Singapore's own JJ Lin among them) collecting or launching NFTs (such as Melania Trump's painting of her own eyes). What is more, according to Galaxy Digital, blockchain and crypto startups saw a record US$32.8 billion in funding from venture capital on more than 2,000 projects in 2021, which is double that of 2020.

What can we expect in 2022?

First, we are going to see much stronger regulation by governments and central banks around the world that will demand tighter 'know-your-customer' requirements and stronger anti-money laundering measures for exchanges. Expect to also see more countries formulating taxation regimes for cryptocurrencies in some form and even some countries start holding a small portion of cryptocurrencies in their foreign reserves.

This is likely to have a short-term impact for digital coins but, in the grand scheme of things, this is a welcome boost for the cryptocurrency ecosystem. Tighter regulations and oversight will go some way in cleaning up the (somewhat imprecise) image of the 'Wild West' field of cryptocurrency populated by criminals, money launderers and drug traffickers. Governments are now realising it is futile and impossible to ban cryptocurrencies, so they must learn to live with them. Many crypto-enthusiasts have also slowly accepted that a completely inoculated financial system outside traditional finance and governmental scrutiny may not be the best idea especially when 'rug-pulls' and scams are rife.

Second, 2022 will see a maturing of Decentralised Autonomous Organisations (DAOs). DAOs, simply put, are leaderless groups of individuals pooling their resources to achieve certain goals. Rules, decisions and governance are programmatically coded into 'smart contracts' within the blockchain. In theory, this means a truly hierarchically flat organisation where everyone can collectively decide on decisions. 2021 saw more of that theory translated into practice. ConstitutionDAO, for instance, was formed in 2021 with the purpose of purchasing a copy of the original United States Constitution. While they narrowly lost the winning bid (US$43.2 million), this showed how DAOs can be executed and made to work in the real world.

2022 will see a maturing of DAOs that can govern and achieve their mission. Unencumbered by geography (like a state) or profit motives (like companies), DAOs are much freer to pursue social missions - on a much wider and much more expansive scale. In that way, more DAOS will strive to provide public goods or fulfil a social mission beyond simply acquiring an asset. For instance, KlimaDAO, a climate-change-focused DAO, has had some success in raising the floor price of renewable carbon credits as it seeks to disrupt "the VCM by increasing the price floor across carbon offset indices" so that economies and companies will take urgent action to switch to low-carbon technology.

Third, expect China to make a splash with the national roll-out of their Central Bank Digital Currency (CBDC) which will launch in time for the Winter Olympics. While other countries have been hemming and hawing about their CBDC plans, Beijing has smartly stolen a march on everyone else. While the full implications of China's CBDC will take a while to fully tease out, expect to see the CBDC being 'exported' (either in the form of the underlying tech or in transacting in digital yuan) regionally and eventually cashed out as diplomatic and political influence. In that connection, countries around the world will try to belatedly accelerate their own efforts in launching their own sovereign digital currency.

Fourth, the metaverse will be a stop-start affair with incremental gains. Metaverses have become tightly associated with the crypto-economy as the most popular renditions (Gala, Decentraland, Axie Infinity and so forth) are all built on the backs of blockchain technology. Facebook's rebranding as Meta and Mark Zuckerberg's hour-long presentation of what the metaverse will be, was largely met with a negative reception due to fears of corporates taking over and commercialising the metaverse.

Debates over ethics (what if a crime was committed in the metaverse?), legal rules, intellectual/individual rights have already emerged in the wake of his presentation. But product development in this space has never been held up by ethical concerns so investors and venture capitalists will continue to pour money here to chase the next unicorn.

In that regard, a truly integrated, interoperable, and immersive virtual world is still several years away as various metaverses slug it out. What we will see then, is the continued emergence of solo metaverses with tentative steps into this space from governments around the world. Shanghai's 5-year plan, for instance, identified the metaverse as a priority area and called for its integration into public services. The city of Seoul in South Korea has announced that it is going to create 'Metaverse Seoul' that will allow "citizens to conveniently meet with avatar officials to deal with civil complaints and consultations, which are currently handled only by visiting municipal offices".

All considered, 2022 looks set to be another record year with innovation, regulation and more investment heating up what is already a very hot sector.

The writer is an assistant professor at the public policy and global affairs division, Nanyang Technological University. His ongoing research project, funded by Ministry of Education and NTU, studies cryptocurrencies, CBDCs and their effects on geopolitics.

READ MORE: Regulation and compliance - Singapore's crypto game in 2022