Lawyers see crypto regulation coming in 2023 because industry needs to rebuild trust

Despite an uneven year in the crypto markets, many market participants are unperturbed about the long-term health of the sector and say that legal frameworks in 2023 could restore trust in the industry. 

“Crypto will recover,” Katherine Dowling, general counsel member at Bitwise Asset Management, said to TechCrunch. “This is not the death of crypto.”

Given the belief by many that crypto remains here to stay, it’s worth looking ahead. Crypto denizens certainly are — after the FTX collapse, questions circulated concerning crypto’s future and what regulators would do next.

“There’s no impetus for regulators to reduce their level of enforcement activity and recent events are likely to embolden them.” Mayer Brown's Joe Castelluccio

But disappointment in what FTX’s implosion represents is very hard to overstate, Yesha Yadav, professor of law and director of diversity, equity and community at Vanderbilt University, told TechCrunch. “The level of disillusionment and disappointment and sense of feeling deceived by FTX is so deep because it was seen as one of the most compliance-friendly institutions in the crypto economy and one that would be leading the regulatory efforts.”

Now, obviously, FTX is the “poster child for everything that could go wrong,” Yadav said. Its downfall has regulators going back to the drawing board. “They might have to do something different, more far-reaching and strict in response to what happened.”

But, what can we expect from regulators in 2023?

Regulators will finalize some of the proposals they introduced, Alma Angotti, partner and global legislative and regulatory risk leader at Guidehouse, said to TechCrunch. “I think there is a realization that the industry is too big to continue to ‘wait and see.’”

Whenever there is a major failure or situation when investors or customers are harmed, regulators and prosecutors take an even harder look at industry participants, Angotti added.

“It’s safe to say U.S. regulators will continue to pursue enforcement actions across a variety of crypto asset-related activities,” Joe Castelluccio, partner and co-lead of the fintech and digital assets, blockchain and cryptocurrency groups at Mayer Brown, said to TechCrunch. “There’s no impetus for regulators to reduce their level of enforcement activity and recent events are likely to embolden them.”

We’ll see more dialogue in Q1, Dowling said. “Picking that first horse to come out of the gates and get some clear rules of the road will be important. We’ll see more and quicker action on stablecoins coming and more dialogue and motion on it because of FTX.”

Hopefully, the FTX debacle can serve as a case study that will help push the need for clarity and rule-making around custody, customer accounts and liquidity in crypto markets, Dowling said. “The industry needs to rebuild trust in the safety of customer accounts. [ … ] That’s where regulation can really help.”

Castelluccio said he expects increased regulatory enforcement in retail-facing businesses. “We were likely to see this type of stepped-up enforcement anyway, as crypto-asset prices began to fall earlier this year.”

Yadav agreed and thinks legal frameworks for the crypto industry could come next year. “There’s no reason agencies cannot do it within the year.”

But it’s even more likely now given the scale of the damage from the bankruptcies of FTX, Celsius and Voyager, Castelluccio noted.

“In one sense, the bankruptcies of several significant crypto asset players in the past year will likely create some additional skepticism of ‘crypto’ in the broadest sense,” Castelluccio said. “But I think ‘crypto’ is viewed as a homogeneous industry by many and poorly understood in general.”

There is a need for education and dialogue — and now regulators have to get something out there that crypto-market participants can work with, Dowling said. “Whether it be sandboxes or safe playing zones, we need to make that jump into a rebuilding of trust. With proof-of-reserves, transparency and seeing through will be very helpful. That will be the focus in Q1 and Q2 of 2023. That wasn’t the focus in 2022, but we’re seeing an increased importance in rebuilding that trust.”

With that said, there are many blockchain applications and digital assets-related businesses that have nothing to do with the activities of these bankrupt businesses, Castelluccio said. “In five years, we’ll look back and see that the digital-asset market leaders in 2028 are companies planting seeds in those areas today.”