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December 20, 2022

2023 trends

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

This week in Swarm’s last media memo of 2022 we look at the most important trends for DeFi we see coming for the year ahead, including:

  • Self custody to become the industry standard
  • Tokenization of RWAs to make definitive arrival
  • DeFi to supplant CeFi in the digital assets market
  • European crypto prepares for MiCa

Self custody will become the industry standard in 2023

This year has been a watershed moment for decentralized finance (DeFi), and the wider crypto sector. We’ve had not one but two market flashpoints that have taken out some big names in the space. But this will clear the way for the stronger, better organised and more sustainable innovators in the coming years.

One of our key trends to watch springs directly from the FTX saga, but was already emerging in relevance – self custody. Getting people and companies familiar with the notion of self custody will take time and is a big educational undertaking. 

Crypto in the early days was founded on the notion of self custody as standard. The sector moved away from this with the difficulty surrounding the creation of a seamless and user-friendly self custody experience, driving reliance back toward centralized financial (CeFi) platforms.

This has been a notable failure in 2022, but the data are clear that users are now embracing self custody as a safe solution. Where the sector needs to work hard now is to make that self custody process as neat and reliable as possible to embed the practice in the blockchain ecosystem. 

DeFi could supplant CeFi after a watershed 2022

CeFi has tried and failed to create a new form of digital financial ecosystem, often replicating failures of old-school finance that were shown to be lacking in key regulatory safeguards that protect not just institutions but the entire system.

CeFi has, in many ways, proven an easy entry point for millions of users looking for exposure to crypto as an asset class. But the platforms that have grown into the giants of the sector have, in many cases, made the same mistakes of the past, with woeful collateral controls, thin pretexts of decentralization and highly questionable backroom practices.

Instead, DeFi can lead the way in providing transparent, efficient and reliable technologies that will power digital asset ownership into the future. This will come through an increasing union with mainstream financial institutions, assets and participants, as those entities look to diversify and adapt to a changing digital world.

Businesses have grown based on custodian models and entire populations are used to having their money kept safe by someone else. 2023 then needs to be the year that the sector promotes and delivers realistic self custody options to holders. 

We’ve seen in 2022 the seeds of major developments in the ecosystem planted. Although crypto markets have had a terrible year, many innovators and ideas have pushed on to start powerful value propositions with enormous potential to create change. 

On chain real world assets will make their definitive arrival in 2023

The DeFi sector has begun to focus on bringing real world assets (RWAs) onto blockchain technology in the past year and the sector is beginning to pick up a head of steam that could lead to a critical mass in 2023.

RWAs are the missing piece of the puzzle for DeFi and the process of integrating TradFi infrastructure with DeFi solutions. For years, the sector has danced with crypto tokens that don’t provide value, aside from notable exceptions such as Ethereum (and the benefits of staking). 

Bringing real world assets (RWAs) on-chain and giving owners confidence their assets are safe is essential to the progress of the sector. People need confidence with their collateral, from issuance to custody, or else providers will struggle to entice asset owners to participate. With that confidence in place, the potential scope of a market for the digitalisation of RWAs is almost impossible to underestimate.

We’re talking about a trillion dollar opportunity to make space for RWAs such as equities, bonds, property and many other kinds of assets in the digital sphere – making their digital ownership, custody and exchangeability seamless, transparent and completely reliable.

2023 will also be a big year for the securitisation of tokenized assets. This is a key facility for institutional traders and retail investors to be able to access digital assets, within existing payment and trading infrastructures. Securitisation will be important for making the process of registering, listing, buying and selling crypto assets accessible and secure. 

European crypto gets ready for regulation

Regulation has come to the front and center of the sector’s concentration this year, especially in light of the notable collapses of major exchanges. 

But different jurisdictions are at very different points in the roadmap for regulation. The US is still very much figuring out what it wants, and whether it even needs new rules for crypto. In the UK, the Financial Services and Markets Bill is on its way through parliament, but the shape of that bill will take some time to form a clear picture.

In the EU however, we’re much further advanced with MiCa legislation looking to codify some major new rules for the sector. This is a real positive for those operators who believe, like Swarm, in a regulatory-first approach to DeFi and are prepared for a new era for the sector. Those that don’t prepare now will get caught out as soon as the rules are implemented. Compliance is critical.

So what can we expect in terms of speed of delivery?

We expect MiCa will be largely in place in around 12 months, by this time next year. This gives crypto operators in the EU roughly a year to become fully compliant with rigorous new rules that will define the future of the sector in the region.

We’ve also argued in the recent past that MiCa is really important beyond the borders of the EU, because it will likely set a precedent for other regulators to follow, the so-called Brussels effect. This means it is essential even for non-EU crypto firms to be paying attention to MiCa, as it will likely color decision-making in their own jurisdictions in the years to come.