With 2022 now fading into the background and 2023 underway, a review of some of the 2022 highlights in cryptocurrency provides an opportunity to look at the developments of the past year with a fresh perspective – and to identify some patterns that could impact the coming year. Despite increasing interest in and acceptance of cryptocurrency, 2022 served as a wakeup call for many crypto enthusiasts who previously viewed crypto as the “wild west.” Massive market value loss, notable, high-profile project failures and lawsuits, and new regulatory scrutiny combined to make 2022 a fascinating year in crypto, but one with meaningful ramifications for the entire industry – in 2023 and beyond.

Here is some of the top activity from 2022 that should shape the 2023 crypto market:

Increased Cryptocurrency Regulation

Authorities throughout the world – but especially in the United States – stepped up cryptocurrency regulation in 2022. And, in the search for a comprehensive and clear rulebook, President Biden issued an executive order directing federal agencies to come up with a comprehensive plan for cryptocurrency regulation and enforcement.

As many in the industry anticipated, traditional cryptocurrency appears to be fast-tracked towards “security” classification, with elements of traditional banking oversight. Some examples from the past year include:

More enforcement is virtually guaranteed: SEC announced in May it would increase its Crypto Assets and Cyber Unit by 20 positions, to a total of 50 positions dedicated to protecting investors from crypto and cyber threats.

In addition, President Biden called for a national policy, focused on six priorities:

  • consumer and investor protection
  • financial stability
  • illicit finance
  • U.S. leadership in the global financial system and economic competitiveness
  • financial inclusion
  • responsible innovation

Congress also held at least 15 hearings in 2022 focused on cryptocurrency and blockchain policy. Two major bills – the Responsible Financial Innovation Act of 2022 and the Digital Commodity Consumer Protection Act of 2022 – propose a regulatory framework for the industry. These bills and the presidential order suggest continued, accelerated crypto regulation in 2023.

Crypto Controversies

While wider macroeconomic factors certainly impacted cryptocurrency values and crypto-related stocks and companies, that is certainly not true of all of the crypto losses in 2022. Major players such as Terra and Three Arrows Capital suffered devasting losses not directly related to the larger economic climate.

Of the controversial crypto collapses, perhaps none is as well-known, publicized, and talked about as former industry darling FTX, the third largest crypto exchange at the time. FTX was known for flashy ads, A-list spokespeople, large political and charitable donations, and purchasing or otherwise financially supporting distressed crypto entities. FTX founder Sam Bankman-Fried was a crypto celebrity in his own right, frequently testifying before Congress on crypto and industry-wide issues.

In November, however, FTX effectively collapsed due to liquidity problems, kickstarting an almost unprecedented series of events. Losses are expected to exceed $8 billion, with John J. Ray III, who oversaw the Enron liquidation, stepping in to oversee the FTX liquidation.

In addition to attempts to recover losses, the FTX collapse also led to lawsuits related to spokesperson accountability and liability, entangling A-list celebrities such as Tom Brady, Gisele Bundchen, and Larry David in the controversy over the collapse of FTX.

The FTX celebrity endorsements were not the only ones that faced scrutiny; despite some apparent misgivings by the court, Kim Kardashian and Floyd Mayweather, spokespeople for EthereumMax, averted class action lawsuits for their promotion of that project, in a decision that may impact the liability of FTX spokespeople (though, as noted above, Ms. Kardashian did come to terms with the SEC).

Cryptocurrency Collapse

Cryptocurrency is no stranger to boom and bust cycles, but 2022 was especially dramatic: the entire asset class lost roughly 70% of its value. Bitcoin, for example, started the year trading near $42,000, peaked at a little over $46,000 a few months in, and then plummeted to a low near $16,000 at the end of the year. No doubt many of the related regulatory and legal entanglement are tied to the overall collapse of the market.

2022 was a particularly wild ride for crypto. 2023 will likely be somewhat more stable as the markets, regulators, and lawyers continue to address the some of the outstanding drama from 2022, but the biggest lesson from 2022 will endure: be prepared for anything!

Harris Beach’s Blockchain and Digital Assets Industry Team is closely following industry developments. If you have questions about this subject or other related matters, please reach out to attorney Jack M. Martins at (516) 880-8399 and jmartins@harrisbeach.com, or to the Harris Beach attorney with whom you most frequently work.

This alert is not a substitute for advice of counsel on specific legal issues.

Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.