Recent turbulence in the crypto sector and the subsequent crackdown by regulators on major players in the field have raised questions about the practical applications of blockchain technology in traditional finance.
Crypto raised doubts
The collapse of FTX in November 2022 marked the end of a challenging year for the crypto market, marred by price drops and scandals that left a lasting stain. Throughout this year, regulators clashed with the blockchain industry, with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) taking action against Binance and Coinbase for alleged trading violations.
In 2021, the blockchain technology rode high on the wave of crypto enthusiasm, with exchanges securing celebrity endorsements and striking high-profile sponsorship deals. Some, like the now-defunct FTX, even splurged millions on Super Bowl ads. Venture capital funds also poured around US$30 billion into crypto projects in both 2021 and 2022.
Rethink on relevance of blockchain
This year, however, investors are more cautious, and the regulatory heat has prompted traditional finance to rethink its stance on a technology once seen as the future of banking. Carl Uminski, executive vice-president at CI&T, noted, “Investors may not see blockchain as a profitable asset yet, so newer businesses adopting these technologies may struggle.”
As the crypto industry faced turbulence at the end of the previous year, high-profile blockchain experiments also faltered. The Australian stock exchange scrapped plans to move share clearing and settlement to a blockchain-based platform, and for example TradeLens, a blockchain-inspired supply chain solution, was discontinued.
Tokenisation is the way forward
Despite these setbacks, there is hope for blockchain technology. BlackRock CEO Larry Fink sees tokenization—digitizing traditional assets and placing them on a blockchain—as the “next generation for markets.” The London Stock Exchange Group is also working on an “end to end” blockchain solution.
However, blockchain’s entry into traditional finance faces competition from artificial intelligence (AI), which is making waves in banking. AI can analyse data in real-time and improve customer service, potentially reducing the need for blockchain.
But as banks increasingly use AI to combat scams and fraud, there could be fresh demand for broader adoption of blockchain systems to enhance security. Uminski believes that blockchain can strengthen security through a decentralized ledger.
Ultimately, the fate of blockchain in traditional finance may hinge on the crypto industry’s ability to satisfy regulatory scrutiny. While some remain sceptical about blockchain’s practicality, its future impact will depend on its ability to adapt and find a secure place in the financial world.