In 2021, cryptocurrency millionaires were on the covers of magazines for all the right reasons. In 2022, they're on the cover of magazines for all the wrong reasons, joining those who realise that magazine covers are slippery slopes to doom.
The state of the global crypto ecosystem in 2022 has juxtapositioned itself with its state in 2021 all too perfectly. Last year, it was thriving, as around 13 months ago, most cryptocurrencies saw their lifetime highs. Today, the prices of most benchmark cryptocurrencies are trading at prices around a third of that.
These lower prices of crypto assets, combined with more regulatory scrutiny over the industry, fading interest from the masses and a general lackluster attitude towards last year's red-hot market has brought about a so-called 'crypto winter'.
The crypto winter has spared no one. Once flashy crypto entrepreneurs are subject to manhunts or have landed under arrest.
Why 2021 was good for crypto and why 2022 wasn't?
The rally in crypto assets started in April 2020, which coincided with the first sparks of a broader asset rally that included the equity markets. This broad rally would last almost 18 months. It started at the time when the first set of lockdowns were imposed to counter the new COVID-19 pandemic that swept the world. Economies attempted to buttress its effect on their citizens by lowering their key interest rates to make borrowing easier, relaxing credit default norms and giving monetary handouts.
This easy money found its way into the crypto (and equity market), driving the prices of these assets to record highs after overcoming initial jitters; as a result of the once-in-a-century health emergency.
In 2021, when the second wave of the pandemic struck and a new wave of monetary handouts were given by governments, this too found its way into more advanced crypto assets like non-fungible tokens (NFTs). Bitcoin rallied 64%, ethereum 403% and dogecoin 3,544% in 2021, while NFTs sold for millions of dollars.
But in 2022, with the worst of the pandemic behind, however, starting in May 2022, economies have started countering this easy money and the resultant inflation by hiking interest rates and cooling job markets. As a result, these asset price rallies have fizzled out, making the industry generally cautious and reigning in the animal spirits it exuded in 2021.
Returns on benchmark cryptocurrencies have been negative, with bitcoin losing 63% of its value this year.
With the systemic collapse of several crypto institutions, the industry is also seeing an issue of trust.
India's crypto spillover
In 2020 and 2021, crypto in India had gained the same manic traction as it did around the globe. This was due to the ability of Indian cryptocurrency exchanges to lure investors toward exorbitant cryptocurrencies. During this time, the Indian crypto industry had already put out boisterous advertisements at high-profile events like the Indian Premier League and ran bold marketing campaigns to attract an Indian population stranded indoors to invest in these assets.
India's 2020 and 2021 crypto rally also coincided with that of other assets, like the stock market.
They were successful, building on crypto's regulatory gray area that prevailed in India. Assets in the crypto space -- cryptocurrencies and NFTs were not illegal, but there was no law in particular that applied to them.
However, in India, cryptocurrency prices saw a cooling in line with their global counterparts as it too witnessed the tap from which easy money was flowing gradually close. This is because India too faced an inflationary problem after the pandemic and hiked its key policy interest rates five times since May.
This year, Indian cryptocurrency exchanges faced high-profile regulatory actions too. In August, one of India's largest exchanges, WazirX, faced searches by the Enforcement Directorate, and exchanges like CoinSwitch Kuber and CoinCDX under increasing legal scrutiny in a sign of reduced investor interest in them.
2022: The year when the mighty fell
In 2022, two high-profile cases in the crypto industry shook its tenets and raised questions about its long-term sustainability.
Case in point is Do Kwon, the charismatic and Twitter-savvy CEO of South Korean crypto firm Terra and Sam-Bankman Fried (SBF), an American entrepreneur and former crypto billionaire whose near overnight loss of wealth has been one of the quickest in history.
Do Kwon heralded Terra, which ran a symbiotic crypto ecosystem that consisted of two parts —First, was its cryptocurrency, Terra Luna and second was TerraUSD, a stablecoin (a crypto token that can be exchanged one-for-one with the US dollar). Both helped the other keep their value - Luna were brought and sold to help TerraUSD remain stable at $1 per token, while TerraUSD was expended to stabalise volatility in Terra Luna.
But in May, this self-sustaining system broke. TerraUSD's peg was broken, falling as low at 20 cents to the dollar. Terra Luna's collapse too was nothing short of a spectacular disaster. From a high of $116 for a token in April 2022, closing at $17.52 on May 11, $1.07 on May 12 and less than a thousandth of that at $0.004173 on May 13. This overnight collapse has a price tag of $40 billion of investor wealth wiped out.
South Korean investigators are keen on making an example out of Do Kwon, who is currently on the run. Earlier speculations suggested he had fled to Singapore. Now, he is rumoured to be in Serbia. Do Kwon maintains that the collapse was business gone wrong, and authorities' vendetta against him would stifle creativilty and entrepreneurship in the crypto space in South Korea.
But SBF is outright accused of fraud, as the world's second-largest exchange FTX of which he was CEO and its native token, FTT, collapsed in a similar fashion. In less than a weekend starting November 11, he lost most of his $26 billion fortune. FTX is accused of transferring billions of dollars of client wealth to Alameda Research, FTX's sister concern. Both of them have now collapsed and have filed for bankruptcy. SBF was arrested from the Bahamas and is now out of prison on a $250 million bond under house arrest.
What made his case even more interesting was his close proximity to the ruling dispensation in the United States. He personally donated $40 million towards the Democratic Party this year, reportedly becoming their second largest donor. A now bankrupt FTX wants to claw back several of these donations.
All in all, the collapse cost $32 billion and gutted a sprawling new-age empire. SBF, though, remains under house arrest in a mansion.
India's crypto becomes sarkaari
While there still is no law that specifically regulates cryptocurrencies in India, the government finally did provide clarity on how they would be taxed on February 1, during the Union Budget, when Finance Minister Nirmala Sitharaman announced that "digital assets" like cryptocurrencies would be taxed at 30%.
Sitharaman used the term "digital assets" deliberately to refer to "cryptocurrencies" as she and the government maintain that cryptocurrencies like bitcoin are not currencies due to their lack of sovereign backing.
But earlier this month, the Reserve Bank of India filled this gap by launching a state-backed cryptocurrency that was India's version of 'central bank digital currency (CBDC)', called the 'digital rupee', stylised as 'e₹'. It's retail version (e₹-R) is being tested since December 1 among a closed group of users. Before that, in October, a wholesale variant pilot (e₹-W) was launched.
The government has been keen on a CBDC due to the lower production and maintenance costs this solution provides viz-a-viz traditional paper currency.
A CBDC aims to be a perfect substitute for paper currency, as both these assets will carry the promise of a value backed by the state. They will share the same features too, like being freely accepted, being able to be easily converted into assets like bank deposits and vice versa. At the most basic level, these digital tokens would be offered in same denominations as cash and could be paid to a peer or to a business.
The RBI has announced that the wallet service which will be offering this CBDC will be offered by marquee banks. This begs the question: can the RBI's CBDC truly replicate the privacy aspect cash can offer?
Cash transactions are anonymous and cannot be tracked without prior preparation (like marked banknotes). But identification requirements by wallets could render the CBDC less reliable on anonymity, deeming them to be psuedo-anonymous even though the transaction themselves would not be tracked. More on this is yet to be spelled out in 2023, though the RBI's e₹ initiatives are yet to be met with widespread enthusiasm.
But the Reserve Bank of India is nonetheless upbeat. Its governor, Shaktikanta Das, in a recent statement termed CBDCs to be the future while stating that cryptocurrencies (like bitcoin) could bring on the next major global financial crisis.
Meanwhile, India still waits on its cryptocurrency law.
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