2022: The year of crypto musical chairs

2022: The year of crypto musical chairs

January 3, 2023

What has arguably been one of the most hectic years in crypto, has finally come to an end. While it may not have been the best for the digital asset industry, we are confident this was a necessary evolutionary step. A step for the market to come back stronger, leaner, and fitter, with only the most credible and trustworthy players left standing.

Everything that’s happened in 2022 has impacted every single individual, organization, and institution in the industry. So we wanted to take this opportunity to share our take on recent developments, and what might happen next.

The year of crypto musical chairs 

Everyone’s good at playing musical chairs when the beat goes on. Until the music stops. There’s only a few chairs. And we realize there’s way too many players. Last year in crypto felt like a massive game of musical chairs - only with far greater consequences than an innocent children’s game.

What is perhaps the most disappointing about the collapse of 3AC, Voyager, FTX and the rest like them, is that none of these companies truly embraced the core values our industry is driven by. These were centralized entities that took control of customer funds, as middlemen often do, and were enabled to take on risky positions based on their reputation and promises made. 

Two memes capture the essence of core blockchain values including decentralization and transparency.

  • Not your keys, not your crypto.
  • Don’t trust, verify.

Companies like FTX rejected these values, and fell to good old fashioned greed, dishonesty, and recklessness. The good news is that none of this had anything to do with blockchain technology. Throughout the drama, Bitcoin processed transactions, DeFi executed smart contracts, and DEXs matched trades.

The code works. Snake-oil salespeople don’t.

We can’t let these bad actors cloud the broader perception of digital assets, blockchain technology, and all the innovations currently being trialed. To protect our industry, restore the confidence of users hurt during this cycle, and gain the trust of those still on the fence as we enter the next growth phase, we must all ensure that everyone who plays also plays by the rules. 

The 3 rules to live by

Rule #1: Every company must have its own licensed digital asset custodian

The biggest, strongest players in the crypto industry have traditionally been centralized exchanges, which explains why they’ve also been providing additional services besides matching trades such as custody and DeFi related products. But the fall of FTX and other centralized lending platforms this year clearly indicate that we can’t let a few opaque organizations service a majority of the market.

Using independent licensed custodians is a way to ensure that an unbiased third party is in charge of valuable assets in order to protect the real owners. Since our founding back in 2018, we’ve been committed to delivering on that key promise: safely and securely managing the digital assets and private keys of our clients. 

To operate effectively as a custodian, we need the full trust of our clients. That’s why we always do things the right way without exception.  

We segregate all our clients’ assets from our own, legally and technologically. We acquire the appropriate licenses in every jurisdiction we operate in. We consistently put internal and external risk management as priority to make our security top notch. We only take actions following client instructions that meet pre-set approval workflows. These rules are embedded in our foundational principles.

Rather than thinking of it as an exchange ‘outsourcing’ custody to a third-party, we need to reframe our mindset towards meaningful collaboration. Our industry moves fast. To do so safely, we need to work together as a real community and help each other whenever we can.

Rule #2: Be regulated and audited – no excuses

If the goal of the digital asset industry is to replace the traditional financial system, it needs to adopt the same regulated procedures to ensure institutional integrity. The rule here is very clear: embody transparency by committing to regular auditing, on-chain asset segregation, and compliance with regulatory policies.

Players should start seeking regulatory approvals and acquire the appropriate licenses to operate in their chosen jurisdictions. Yes, the digital asset industry is yet to have a fully comprehensive and robust regulatory framework. But there are always options to do things the right way. A simple example would be to work with a Big Four auditing firm to track and prove your assets, liabilities and activities. While this isn’t the only answer, it is one of the many things needed to upgrade from the currently unregulated, unsupervised industry we operate in today.

Rule #3: USE blockchain technology

Blockchain technology is what brought us all here, yet very few centralized organizations operating in the digital asset industry actually use the technology. If an exchange offers a staking product to its users but there is no way to verify on-chain staking transactions, then it’s nothing but a savings product by a different name. All DeFi applications run on blockchain technology, so it’s no surprise none of them have had the same issues of corporate creed and internal theft. 

Blockchain technology is immutable, verifiable, and decentralized. It’s completely code-driven, which reduces the threat of compromises originating from within an organization. Blockchains are the perfect way to permanently record what assets belong to who, where these assets are sent, and how much they’re worth. All in a matter of seconds, or minutes at most. And the cherry on top: it’s fully public and open-source, making it easy for anyone to verify the information. 

One of the hottest topics of discussion on crypto Twitter today is the need for exchanges to provide proof-of-reserves using merkle trees so that each user is able to verify their assets on-chain. But this is just the first step. We need to take a far more rigorous approach when it comes to proving liabilities and maybe even automated company audits. Who knows what will be possible in a year or two.

Building for the future

It will take time for a more comprehensive regulatory framework to be put in place for the digital asset industry. Until that day comes, it’s on all of us to restore confidence in our industry moving forward. To build a reliable trustless system. That means less centralization failures and capital-driven motives, and more transparency and accountability. 

Market confidence may be at a low point right now, but that doesn’t stop us from building for the future. We remain convinced of the tremendous growth potential of the blockchain industry. If you’re curious about what that building looked like in 2022, see our latest Year in Review

And with that, we’ll wrap up our year. We’re looking forward to 2023 - to apply the lessons learnt, and continue being committed to creating a better financial system based on the tenets of decentralization, transparency, and verifiable ownership.

Until next time, 

The Hex Trust team

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