Wall Street bank giant JP Morgan & Chase believes that 2023 will bring major changes to the cryptocurrency industry in the form of regulation, according to its latest global market strategy report, which will see cryptocurrencies and traditional finance diversify. Convergence is likely to occur with the industry.
Big changes coming to the cryptocurrency industry in 2023 pic.twitter.com/qW6cHLyc6N
— Alex Kruger (@krugermacro) November 28, 2022
Reflecting on the FTX and Alameda Research debacles in the document and the “collapse of a series of crypto entities,” JP Morgan explains how the crypto ecosystem will change, and what major the company envisions for the future. I question the change.
rapid regulation
The document looks at promoting existing regulatory initiatives already underway, such as the European Union’s Crypto Asset Market (MiCA) bill.
JP Morgan has already passed most of the EU legislative process, with the exception of final approval by the EU parliament, and expects final approval is likely before the start of 2023.
The bank added that there will likely be a transition period of up to 18 months before the new regulations “take effect at some point in 2024.”
Custody-centric regulation
JP Morgan has documented a proposal that new regulatory initiatives are likely to emerge focused on “storage and protection of customers’ digital assets, similar to the traditional financial system.”
The company noted the exponential growth of hardware wallet providers Ledger and Trezor after the demise of FTX, which it said led to “an increase in cryptocurrency self-custody.”
Regulation of unbundling activities
The document notes the potential introduction of new regulatory initiatives focused on the separation of brokerage, trading, lending, clearing and custody activities.
JP Morgan said:
“[These regulations will have the] The impact on an exchange like FTX combining all these activities raises issues regarding customer asset protection, market manipulation and conflicts of interest. ”
Regulations on transparency
Investment banks also introduced new transparency-focused policies, including mandatory regular reporting and auditing of reserves, assets and liabilities of “exchanges, brokers, lenders, custodians, stablecoin issuers, etc.” We also mentioned that regulatory initiatives may enter the crypto space.
The company says these regulations will likely be imported from the traditional financial system, which will lead to:
“The Convergence of the Crypto Ecosystem into the Traditional Financial System.”
Crypto derivatives move to regulation
According to the document, the cryptocurrency derivatives market is likely to transition to regulated exchanges with the Chicago Mercantile Exchange (CME) emerging as the winner.
With some institutional investors such as hedge funds trapped via derivatives positions on FTX, there could be a greater shift towards regulated targets such as the CME for both futures and options. ”
JP Morgan noted that such a shift would likely enhance the role of the Commodity Futures Trading Commission (CFTC) in crypto markets given that US derivatives markets are regulated by the CFTC.
Shift from CEX to DEX
In a Nov. 24 memo, JP Morgan concluded that the company was “skeptical about the structural shift from a centralized exchange (CEX) to a decentralized exchange (DEX).”
As decentralized finance (DeFi) becomes mainstream, the company pointed out some of the hurdles emerging sectors face.
- Price discovery — currently provided primarily by exchanges via oracles
- Smart contract risk (hacking protocol attack)
- Management/audit and governance without compromising security
- Systemic risk arising from automatic liquidation when collateral falls below a certain level
- The downside of DeFi over-collateralization over traditional finance
- Frontrunning on DEX
- No limit order/stop loss function
- Difficult to assess risk/return trade-offs in DeFi
- Pooling assets into liquidity pools (LPs) can make institutional investors uncomfortable
“As a result, we believe that centralized exchanges will continue to play a major role in the crypto ecosystem in the near future, especially for large institutional investors, despite the collapse of FTX.”
JP Morgan said.
