This is 2023's crypto crisis

As the crypto market recovers from the losses of last year, the cryptocurrency industry is once again at a crossroads. The market of this year is very different from the one of last year.

Central banks are waking up to the appeal of cryptocurrencies as well as the potential for blockchain technology, and developing their own central bank digital currencies.

Meanwhile, regulators are also scrutinising what the industry is doing, and enforcement actions are ongoing against some of the largest players in the industry, including Coinbase and Binance.

In sum, 2023 is proving to be a far unfriendlier environment for the industry than previous years- and not just in terms of the industry being under pressure from outside. Last week, Arkham Intelligence, with its mission to deanonymise the blockchain, marks the start of a philosophical revolt within the crypto space.

Where does this leave the industry, and how will these new challenges change the industry?

Market competition: CBDCs

Many in the crypto space see CBDCs as one of the biggest threats to crypto. They point to the amount of power that governments and central banks will hold over CBDCs, including the ability to monitor transactions.

Yet, blockchain-based CBDCs have the ability to bring some benefits of blockchain technology to the masses. Instantaneous settlements, lower transaction costs, and many other features will eventually be made part of the fiat world, and people will no longer have to use cryptocurrencies to benefit from these features.

As such, crypto advocates have a point when they highlight the potential for CBDCs to potentially compete with the crypto industry.

It seems that crypto, at the moment, is really a solution looking for a problem.

As a payment currency, CBDCs look to be at least on even footing with it. As an investment or a hedge against inflation, traditional investments have not yet died out.

Of course, this is not necessarily a death knell for the industry- but it is perhaps indicative that it is time for the industry to do some serious thinking on what crypto, rather than blockchain, has to offer.

Fierce opposition: enforcement crackdowns

On the regulatory front, crypto is also facing a slew of regulatory issues. Regulators and even legislators are no longer content to simply allow crypto to continue operating freely.

Instead, they are taking closer looks at the activities of crypto companies and at crypto itself.

The US Commodities and Futures Trading Commission has brought lawsuits onto Binance, while the Securities and Exchange Commission has sued Binance and Coinbase, and is preparing an appeal against Ripple.

The US Senate has also passed a bill that would require DeFi protocols to implement anti-money laundering measures.

These enforcement and legal crackdowns have received mixed responses, but what is cut and dried is that regulators are no longer keen on sitting on the sidelines, and are instead taking a more active approach when it comes to regulation.

Moving forward, crypto companies may not be able to see the same ‘wait and see’ attitude that they have perhaps come to expect.

Instead, enforcement actions will likely become more frequent and more strident.

This in itself is not necessarily a bad thing. Enforcement actions have uncertain outcomes, and cases could go either in favour of regulators or for crypto companies. But legal decisions do form the basis for regulatory action, and this provides regulatory clarity on what companies can and cannot do, as well as what cryptocurrencies are under what circumstances.

Ideological revolt: the rise of Arkham and its followers

The most significant threat, therefore, is the ideological revolt that Arkham represents.

The rise of Arkham indicates that not everyone in the crypto space is on board with the ideology of privacy and anonymity that many see as the raison d'etre of cryptocurrency.

With time, this could prove extremely divisive. Without a common goal, the crypto industry may splinter into different camps- one camp that holds anonymity and privacy as sacred, and another that aims to divorce the technology from the ideology.

Arkham may be the first, but it is not necessarily the last. Arkham’s popularity indicates that there is already a group of crypto users who are not necessarily satisfied with the way that the crypto space is right now, especially when one of the largest beneficiaries of privacy and anonymity are criminals and criminal organisations who prey on everyday users.

This ideological split must therefore be dealt with quickly- and it is time for the industry to take a step back and really question if the complaints about the industry are really features, or problems that have to be dealt with.