The recent uproar in the crypto markets and resulting regulatory crackdown on major players in the sector has dented the appeal of their underlying blockchain technology to traditional financial operators.
The collapse of FTX in November 2022 ended a year of crisis in crypto markets during which falling prices 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 Commodity Futures Trading Commission’s lead in bringing charges against Binance, the world’s largest crypto exchange, for alleged trading violations. Coinbase, its publicly traded rival, also faces similar charges from the SEC.
At the height of crypto enthusiasm in 2021, blockchain technology gained mainstream attention, with exchanges gaining celebrity endorsements, securing high-profile sponsorship deals, and multiple Super Bowl commercials from several million dollars, including the now-defunct FTX.
The sector also attracted significant investment from venture capital funds during the record market rally. According to financial markets data provider PitchBook, investors invested approximately $30 billion in crypto projects in 2021 and 2022.
This year, however, that figure is expected to be closer to $10 billion, as investor exuberance has subsided and regulatory pressure on companies at the blockchain epicenter has prompted traditional finance to reconsider its approach to a technology once touted as a new dawn for banking. .
“The current macroeconomic downturn has led to a reassessment of companies, with some not receiving the funding they expected,” says Carl Uminski, executive vice president and partner at CI&T, which advises companies on internal digital transformations.
“Investors are currently playing it safe and may not yet view blockchain as a profitable asset, so new companies adopting these technologies may struggle to scale at the pace they were hoping for.”
Late last year – as the crypto industry was reeling from not only the collapse of FTX but other industry metrics including Celsius and Three Arrows Capital – a series of experiments large-scale blockchain projects have failed.
In November, the Australian Stock Exchange abandoned a plan to upgrade equity clearing and settlement to a blockchain-based platform. The same month, TradeLens, a blockchain-inspired supply chain solution for the shipping industry designed by Maersk and tech giant IBM, was discontinued.
“It’s an illusory phenomenon that some corporate innovation departments have a mandate to ‘explore emerging technologies like blockchain,’” says Stephen Diehl, a software engineer, author and crypto critic.
The outlook for blockchain technology is not entirely bleak, however.
Earlier this year, Larry Fink, chief executive of BlackRock, described tokenization – which involves digitizing traditional assets and placing them on a blockchain – as the “next generation of markets.”
The London Stock Exchange Group is already working to become the first major exchange to offer its clients an “end-to-end” blockchain solution, from issuance and trading of securities to reconciliation and settlement.
But blockchain’s struggle to break into established finance is being hamstrung by advances in artificial intelligence, a technology that is turning heads in traditional finance in ways that blockchains once promised.
“Banks can use real-time data and artificial intelligence to identify all the necessary interactions,” says Nick Delis, senior vice president of global and strategic operations at Five9, a cloud systems provider. “They can prioritize high-emotion, high-stress contacts for human agents and route basic requests to intelligent virtual agents.”
“During the interaction, banks can leverage data to provide consumers with real-time information, for example on how their credit is being used, while giving customers the empathy they deserve.”
AI is already used in the banking sector to process and analyze large amounts of data. Monitoring payments and transactions to detect possible financial crimes has also proven to be 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 banks could, in turn, drive new demand for it. favor of wider adoption of blockchain systems.
Uminski, who attributes blockchain’s slow progress to a broader macroeconomic slowdown, suggests it could serve to create long-term industry growth.
“Blockchain can absolutely improve the security of consumer and banking records through the use of a decentralized ledger,” he says.
Ultimately, however, blockchain’s ability to find its place in traditional finance may depend on whether the broader crypto industry satisfies regulators’ scrutiny.
Beyond the SEC’s lawsuits against Coinbase and Binance, U.S. policymakers have delved into even the deepest aspects of crypto, including decentralized finance, which eliminates the need for a third-party intermediary such as ‘a bank.
“The technology behind blockchain, detached from speculation, is not very interesting or particularly useful in practice,” says Diehl. “Companies can continue to create these things if they want, because there is no law against slow, clunky databases, but it will never add value to their business.”