At the end of 2022 the market for crypto assets was rocked by the FTX scandal. This article examine what investors who haven't given up on the sector should do next.

The stunning collapse of FTX in 2022, and the subsequent arrest and court appearance of its founder and CEO, have sent shockwaves through the sector. Where do crypto assets investors go next and what options make most sense? To answer such questions is Takashi Oka, CEO and founder of Øverlay. The editors of this news service are pleased to share these views and invite replies. The usual disclaimers apply. Email tom.burroughes@wealthbriefing.com

The start of the new year is a great time to assess the events and lessons of the last twelve months and to be motivated to set new goals for the coming ones. For the crypto industry, a good dose of realism may follow a self-evaluation of what went down – and what went wrong – in 2022. 

Market turmoil has been rampant in 2022, reflecting a larger concern. Following the collapse of FTX and the arrest of its founder and former CEO Sam Bankman-Fried, many people may be hesitant to invest in crypto, deeming it too risky. It's true that crypto keeps appearing in the news for all the wrong reasons, but cryptocurrencies can still be a viable investment if certain safeguards and assurances are put in place. 

I’ve long been on a mission to bring authenticity, safety and trust to crypto investments, and I believe that the unrest we’ve seen in 2022 can prove the perfect opportunity for turning things around for good. 

In doing so, we can aspire to return to the original idea at the heart of crypto, one where platforms can be used safely and securely and investors don't need to worry about the validity of the products and people they put their trust in. Repeated asset outflows and rug pulls are currently preventing the industry from maturing and reaching mass adoption. The only thing that can turn this trend around, in my view, is a framework for protecting users from fraud and excessive risk while maintaining the decentralised nature of what crypto is at its heart.

I believe we can do this using something known as Regulated Decentralised Finance (RegDeFi), an innovative concept that is starting to take the cryptocurrency world by storm and may turn out to form the new backbone of the financial industry.

As a hybrid of Centralised Finance and Decentralised Finance, RegDeFi brings together the advantages of each system, while implementing more secure procedures for their processes and improving on their commitment to user safety and investment protections. 

When it comes to Centralised Finance, users have very little control over what they're buying into – the operator's behaviour is entirely unverifiable, which prevents fraud from being detected and prevented. In Decentralised Finance, verifiability is not an issue but you cannot require or enforce KYC or similar standards.

RegDeFi solutions protect the investments of individuals and users through a compliance-ready structure with existing frameworks, standards, rules and regulations, thus dispelling the shady image that decentralised technology has come to be associated with. 

The idea behind it is quite simple: blockchain is the foundation that cryptocurrencies are based on. While many abuse its power for speculative purposes, we can use the same pioneering technology to end this unfair and immoral cycle. 

By putting blockchain technology to use for RegDeFi purposes, we can use it to track scams and prevent them from tarnishing the industry’s reputation. By changing the specifications of the blockchain, and modifying them to comply with regulations while remaining faithful to the main purpose of blockchain technology itself, we can lay the necessary foundations for the economy of the future. 

In a hybrid model, this can be done by using blockchain technology with a built-in self-sovereign ID (which directly translates to KYC), like the Concordium blockchain. As a public-layer 1 science-backed blockchain, Concordium is designed to balance privacy with accountability through its ID layer. Its aim is to allow companies to migrate their businesses to blockchain in total safety, and doing the same for ordinary people who wish to invest with peace of mind. 

We need to rebuild the token-based funding market, and we can do so by using Concordium’s ID layer with Zero Knowledge Proof × KYC, whereby both privacy protection and flexible compliance with regulations can be achieved, allowing anyone to invest with confidence.

Besides providing regulatory compliance with pseudonymity (mainly Know Your Customer and Anti-Money Laundering/Counter-Terrorist Funding), RegDeFi solutions also maintain sustainability and decentralisation. Rug pulls can be prevented with a sale method called OIO, and project start-up protection can prevent pump and dumps by distributing tokens fairly to investors, and excluding bots and unverified accounts. 

The RegDeFi model also protects users' identity in entirely new ways, by assigning a ZkSSI (Zero knowledge-proofed Self-Sovereign Identity) that has already been deemed safe by KYC to each network participant. RegDeFi prioritises transparency and due diligence, to help investors make informed decisions about where they're putting their money and how their investments could pan out. 

Traditional finance necessarily favours the market and its fluctuations. Crypto prefers decentralisation at all costs, sometimes even to the detriment of user protection as in the case of FTX. RegDeFi can protect the decentralised structure that crypto needs and lives by, while protecting investors' privacy as well as their money.  

As things currently stand, both crypto enthusiasts and sceptics are rattled. The former because they are suddenly questioning the viability of the project they so believed in, and the latter because they don’t understand how things could have gone so out of control in such a short time. 

At the beginning of the year, crypto was on top of the world. In November 2021, bitcoin hit an all-time high and surpassed $68,000, but look at us now: Sam Bankman-Fried faces wire fraud, securities fraud, money laundering and related conspiracy charges. He faces up to 115 years in jail, and his colleagues Caroline Ellison, Alameda Research’s former CEO, and Gary Wang, FTX co-founder, have already pleaded guilty to fraud charges. If we’re being honest, the whole industry is rattled, and for good reason. 

It has [December 2022] been a hard month and a weird year for crypto, but I believe we can take the events of 2022 as an opportunity to do better in the New Year. And, if we’re serious about crypto sticking around, and managing to carve its path out of the situation we’re currently facing, it will be through clean, safe, reliable and transparent business models. We can start there in 2023, and hope the year will be kinder.