Crypto tumult spurs rethink on best uses for blockchain

The recent tumult in crypto markets, and ensuing regulatory crackdowns on the sector’s major players, have dented the appeal of their underlying blockchain technology to traditional finance operators.

The collapse of FTX in November 2022 capped off a year of crisis in crypto markets in which price falls and scandals left a permanent black mark on the sector. And this year has been defined by flashpoints between regulators and the blockchain industry. In June, the Securities and Exchange Commission followed the lead of the Commodity Futures Trading Commission in levelling charges against Binance, the world’s largest crypto exchange, for alleged trading violations. Publicly listed rival Coinbase is also facing similar charges from the SEC.

At the height of enthusiasm for crypto in 2021, blockchain technology commanded mainstream attention, with exchanges securing celebrity endorsements, striking high-profile sponsorship deals, and several running multimillion dollar Super Bowl ads — including the now defunct FTX.

The sector also drew sizeable investments from venture capital funds during the market’s record setting bull run. According to capital markets data provider PitchBook, investors poured roughly $30bn into crypto projects in both 2021 and 2022.

This year, though, the figure is set to be nearer $10bn as investors’ exuberance has subsided and the regulatory pressure on companies at the epicentre of blockchain has prompted traditional finance to reconsider its approach to a technology once heralded as a new dawn for banking.

“The current macroeconomic slowdown has caused businesses to be revalued, with some not receiving the funding they were expecting,” says Carl Uminski, executive vice-president and partner at CI&T, which advises companies on internal digital transformations.

“Investors are playing a cautious card right now and may not see blockchain as a profitable asset yet, so newer businesses adopting these technologies may struggle to move at the pace they hoped for.”

At the end of last year — when the crypto industry was reeling not only from the collapse of FTX but other sector bellwethers including Celsius and Three Arrows Capital — a series of high-profile blockchain experiments failed.

In November, the Australian stock exchange abandoned a plan to upgrade the clearing and settlement of shares to a blockchain-based platform. That same month, TradeLens, a blockchain-inspired supply chain solution for the shipping industry masterminded by Maersk and the tech giant IBM, was discontinued.

“It’s an illusory phenomenon that certain innovation departments in companies have a mandate from the C-suite to ‘explore emerging technologies like blockchain’,” says Stephen Diehl, software engineer, author and crypto critic.

The outlook for blockchain technology is not entirely bleak, however.

Earlier this year, BlackRock chief executive Larry Fink described tokenisation — which involves digitising traditional assets and placing them on a blockchain — as the “next generation for markets”.

Already, the London Stock Exchange Group is working to become the first major exchange to offer an “end to end” blockchain solution to customers, ranging from security issuance and trading to reconciliation and settlement.

But the blockchain’s struggle to break into established finance is being hamstrung by advances in artificial intelligence, a technology turning heads in traditional finance in ways that blockchains once promised to.

“Banks can use real-time data and artificial intelligence to identify any interactions needed,” says Nick Delis, senior vice-president of international and strategic business at Five9, a cloud systems provider. “They can prioritise high emotion, high stress contacts for human agents and route basic inquiries to intelligent virtual agents.”

“During the interaction, banks can leverage data to give real-time insights to consumers, such as how their credit is being used, while giving customers the empathy they deserve.”

AI is already being used in banking to help process and analyse large chunks of data. Screening payments and transactions for potential financial crime has also proven a popular use case.

However, as banks step up their use of AI to combat scams and fraud aimed at them and their consumers, its impact on traditional banking could, in turn, present fresh demand for broader adoption of blockchain systems.

Uminski, who attributes the sluggish advance of blockchain to a broader macroeconomic slowdown, suggests this could serve to create sector growth in the long term.

“Blockchain can absolutely enhance the security of consumer and the banks’ records through the use of a decentralised ledger,” he argues.

Ultimately, though, blockchain’s ability to find an established home in traditional finance may depend on whether the wider crypto industry satisfies regulator scrutiny.

Beyond the SEC’s cases against Coinbase and Binance, US policymakers have pursued even the deepest corners of crypto, including decentralised finance, which eliminates the need for a third party intermediary such as a bank.

“The underlying technology of blockchain, detached from speculation, isn’t that interesting or particularly useful in practice,” says Diehl. “Companies can keep building these things if they want because there’s no law against slow clumsy databases, but it will never add any value to their business.”