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2021 was a fast-moving and highly interesting year for the crypto space, with great momentum unfolding in its adoption, notably institutional adoption with family offices and asset managers showing a growing interest.
But what will 2022 hold for cryptocurrencies and decentralized finance? Here we will take a look at 8 of the major trends we will keep a close eye on in the year to come.
Trend 1: Increasing Institutional Adoption of the crypto infrastructure
In 2021, the institutional adoption of crypto and DeFi has experienced a clear rise, especially in the second half of the year, and we expect it to continue growing in 2022.
This growth is foreseen to come in three different forms:
- Increasing Institutional Adoption of blockchain technology and crypto infrastructure
Financial institutions have already begun testing or utilizing blockchain technology to underpin their everyday processes – in the fall of 2021 we saw Banque de France initiate a pilot program using blockchain technology to settle bond transactions, while more recently global banks Wells Fargo and HSBC have started utilizing the technology for interbank FX transactions.
Blockchain technology can change and optimize the way banks and other financial corporations do business – in 2022 more institutions are bound to recognize its potential and implement it in their core processes.
- Expansion of Crypto Related Products and Services
2022 will also see the continued expansion of crypto related products and services offered by financial institutions. At DeFi Consulting Group our advisors are seeing increasing demand surrounding institutional-grade crypto products from professional investors, such as family offices.
We expect to see more institutions setting up crypto asset-focused divisions, along with the expansion of institutional-grade crypto products available on the market. Examples include Bitcoin ETFs – while the US has greenlighted Bitcoin Futures ETFs, regulators have yet to approve ETFs tracking physical Bitcoin. This is an area to watch in 2022, as increasing consumer demand may drive the expansion of institutional crypto offerings.
With the crypto space gaining in recognition and adoption, companies are also expected to venture into consulting – Visa is ahead of the pack having launched its crypto consulting services in December of this year, but other financial intuitions are expected to follow suit.
- Bitcoin on the Balance Sheet
Corporations are increasingly anticipated to hold Bitcoin, or other crypto assets, on their balance sheets as a form of investment and/or hedge against inflation. Current examples of companies adopting this strategy include Michael Saylor’s MicroStrategy and Jack Dorsey’s Block.
Trend 2: Clearer Regulation – a need for financial institutions and family offices
While institutional adoption of crypto has been steadily increasing, one of the factors slowing the movement down is regulatory uncertainty around dealing with crypto assets. Some headway was already made in 2021, but in 2022 we expect to see increasing regulatory clarity surrounding the crypto space.
US agencies plan to provide greater clarity on whether certain activities related to crypto assets conducted by financial institutions are legally permissible, along with expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations. This includes cracking down on crypto’s use in fraud, money laundering, and other illegal activity, as well as imposing tax requirements on crypto assets.
Some of the major DeFi protocols are also adapting their offering to specifically cater for family offices and financial institutions with KYC procedures and separate permissioned asset pools.
In Europe, we are likely to see the Eurozone roll out its own crypto regulations called the Markets in Crypto Assets (MiCA) framework – this will provide increased regulatory clarity over crypto assets and DeFi.
Overall, we could see a larger degree of global alignment in crypto regulations along with the potential emergence of international standards. A balanced approach from regulators should be a positive step towards further capital deployed by family offices and regulated investors into crypto and decentralized finance.
Trend 3: Increase in Governmental Involvement
Aside from increased institutional interest in the space, we also expect to experience a rise in governmental involvement in the crypto realm. This can come in different forms, most notably 1) the development of CBDCs and 2) the potential acceptance of cryptocurrencies as legal tender.
- The Development of CBDCs
Initiatives to develop CBDCs (Central Bank Digital Currencies) have already begun in 2021, with China, for example, having entered phase two of its cross-border Digital Yuan trials with Hong Kong. As such, China is the first major superpower to launch a CBDC.
Other nations are not far behind according to CBCDTracker.org, with Europe currently working on the digital Euro, France piloting its own CBDC, and Nigeria having already launched its digital currency, the e-Naira.
- Bitcoin as Legal Tender
In 2021 El Salvador acted as a pioneering force when president Nayib Bukele declared Bitcoin legal tender in the fall. Going forward, other countries could take note and implement similar laws, thereby further spurring the widespread adoption of cryptocurrencies.
The premise underlying the adoption of cryptocurrencies by countries is manyfold; most notably however, it is thought to increase financial inclusion, protect against inflation and boost the economy by allowing people with wealth stored in crypto assets to spend their money more easily. This is also a way to bring media exposure to those countries and facilitate potential foreign investments.
Trend 4: DeFi Accelerates
Decentralized Finance (DeFi) has experienced momentous growth in 2021, with the total amount of money tied up in DeFi protocols (also known as the Total Value Locked, or TVL) jumping from roughly $22 billion in January of 2021 to over $250 billion as of December 2021. At DeFi Consulting Group, we expect to see this trend continue throughout 2022, with the number of decentralized applications (dApps) increasing exponentially.
As new blockchains continuously emerge, we also expect to see the development of more cross-chain bridges – cross-chain bridges enable the transfer of tokens, assets, smart contract instructions or data between blockchains. Their development is a necessary component in the growth of the DeFi ecosystem, as it enables greater interoperability between different protocols, thus facilitating greater access throughout the entire ecosystem.
Lastly, decentralized stablecoins could become a fixture of the DeFi and crypto ecosystems as an alternative to currency backed stablecoins ran by centralized organizations.
Trend 5: The Race for Blockchain Domination
With the DeFi ecosystem growing rapidly, new blockchains are emerging to compete with the Ethereum chain. Ethereum is currently still the leading blockchain used for dApps, operating over 360 protocols with a TVL of $153 billion. However, newer chains such as Terra, Binance Smart Chain, Avalanche and Solana are growing rapidly, with Terra’s TVL jumping from a mere $53,000 in January of this year to over $18 billion as of December 2021.
Most institutional money from family offices and asset managers is still allocated on Ethereum. The emergence and rapid growth of new chains raises the question of whether Ethereum will remain the dominant blockchain in the DeFi ecosystem in 2022. And if not, which chain will take its place at the top?
Trend 6: NFTs Go Mainstream
NFTs saw a massive surge in adoption throughout 2021, catapulting the market to a total value of $7 billion as of November 2021 according to a Business Insider article. Both the number of transactions, as well as the average transaction size have increased – a trend which is expected to continue throughout 2022. While the NFT market is still largely retail driven, with institutional investments accounting for less than 1% of the total market, we expect to see an increase in institutional inflow throughout 2022. One interesting area to watch is the entrance of luxury fashion brands into the NFT space, such as Dolce Gabbana’s nine-piece NFT collection which sold for almost $6 million dollars earlier this year.
One of the main factors prohibiting the wider adoption of NFTs is their somewhat limited use cases. However, through the emergence of online gaming and the metaverse, NFT use cases are expanding drastically, thus paving the way for mainstream adoption in 2022.
Trend 7: The Tokenization of Everything
The tokenization of assets is gaining traction around the globe – according to the Frankfurt School Blockchain Centre (FSBC), the market size of tokenized assets in Europe alone will grow to $1.5 trillion within the next three years.
In the context of crypto, tokenization refers to a process where some form of assets is converted into a token that can be moved, stored, or recorded on a blockchain. Among other things, tokenization allows for the fractional ownership of assets. Use cases include the tokenization of real estate, company shares or even pieces of art. By allowing fractional ownership, the barrier to investment is greatly reduced, and markets can be made more liquid.
DeFi Consulting Group has seen a growing interest on tokenized real-estate from family offices that are observing and getting educated on the possibilities offered by this technology. We expect the field of tokenization to continue growing and to play a major part in the crypto infrastructure space.
Trend 8: Sustainable Mining
As Environmental concerns around Bitcoin mining are growing, the industry is increasingly shifting to a greener ecosystem with Bitcoin miners shifting to green-energy solutions and other blockchains such as Ethereum v2 migrating to proof-of-stake replacing the energy-intensive proof-of-work system.
Mining operations have made fast progress in 2021 to utilize renewable energy sources to generate the necessary computing power for Bitcoin operations. This continued greener approach to Bitcoin mining is another positive trend facilitating incoming investments from family offices and asset managers.
Overall, 2022 will surely be another exciting year for the crypto and DeFi space as institutional inflows continue increasing, regulation is set to become clearer and other notable crypto trends unfold. At DeFi Consulting Group, we specialize in consulting family offices, asset managers and other financial institutions on navigating the Crypto and Decentralized Finance space. Reach out to our team for guidance on how to effectively approach this field.