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July 26, 2022

Crypto winter; FSMB; Barclays

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

Comments available on the following news items:

  • Here’s where this crypto winter differs from the last
  • What’s inside the UK financial bill on crypto?
  • Barclays snaps up Copper stake

What sets the 2022 crypto winter apart from the 2017/18 winter?

The 2017 bull market was built on the ICO boom, which itself was largely built on Ethereum. Ethereum was still a very immature platform, without what you’d call real engagement or activity on the network. It was easy to dismiss it all as fluff. 

There was real euphoria, especially in Q4 2017, but people within the sector could see what was happening and were aware of the ebullient valuations. Among those in the industry, it became fairly commonly agreed that there would be a correction of some sort. 

It felt very similar to the dotcom boom in terms of pure over-exuberance of the market which didn’t really know how to price this new technology correctly. Many companies in the dotcom boom similarly had very little real substance to them, once you scratched the surface. 

The crypto market is different now, and that’s thanks largely to the arrival of institutional capital which behaves differently to the wave of early crypto investors of 2017/18. The market has been massively expanded by this capital, and the macro environment has become a much more powerful indicator of sentiment, because professional investors are making the decisions. It’s being treated like a typical risk-on asset class. 

As for where the market goes now, it’s difficult to see broad sentiment returning to the exuberance of 2021 in the near future. While The Merge is certainly creating traction with investors other headwinds still exist, such a regulatory pressure, more macro worries and rate rises, plus other ‘black swan’ type events such as the Mt Gox bitcoin dump.

But these are singular events. On the good side, a lot of the projects that have weathered the storm are the ones that have real engagement with users and have proven their value and viability. Providers showing robust DeFi protocols are doing well despite the market adversity. They are the ones who will be leading the next boom cycle, once investor confidence returns more broadly. 

UK legislation on crypto gets the balance broadly right

The UK’s government has finally published in Parliament its Financial Services and Markets Bill (FSMB), shedding light on the direction of travel for crypto regulation in the global financial hub that is London. And for the most part, it seems positive.

The bill broadly seeks to bring digital assets, and stablecoins in particular, into the remit of regulators in the UK. It contains key definitions of digital assets that allow for technologies such as stablecoins to become regulated forms of payment. This is a really positive step.

Stablecoins form a crucial part of the DeFi and wider crypto infrastructure because they give users interoperability with TradFi. As such, bringing them within the remit of existing regulatory oversight is both the simplest and most intelligent solution, which is cause for celebration.

The fear with crypto regulation in many regions has been, and continues to be, that authorities will take an overly-pessimistic and heavy-handed approach, creating excessive red tape where none is required. The UK seems to be getting that balance right so far, but others unfortunately have not. 

Barclays takes stake in crypto firm Copper

TradFi giant Barclays has snapped up a stake in $2 billion-valued crypto firm Copper. The news, while not unique in recent months, is another signal that large institutional players are still on the lookout for opportunities in the DeFi space, despite valuation troubles of the past few months.

Barclays joins other major financial players such as JPMorgan and Goldman Sachs in buying up stakes in growing crypto projects. While Copper is not unique in terms of funding, it confirms a clear pattern by major players that are continuing to buy into the space. 

Much speculation has been made of the ‘end’ of DeFi and crypto, particularly with regard to some major notable failures in the sector as a result of recent sell offs in markets. 

Arguably what’s happening here though is the unstable, underfunded or just plain bad projects are being weeded out by a more rigorous financial environment. In the meantime big players with money to spare are still seeking fresh opportunities and future winners.