2022 Trend Prediction: More traditional investment companies will enter the crypto market for the first time

Produced by | Bai Ze Research Institute

2021 was a record-breaking year for the crypto market, with both institutional and retail investors benefiting to varying degrees. For most analysts and industry figures, 2022 will be another year of increased adoption of crypto assets, both in terms of its potential as an investment tool and inflation hedge, as well as its niche segments.

This article combines the views of many people in the crypto industry and predicts the trends in 2022 from the following three perspectives:

DeFi:

• Reshaping the DeFi industry to better meet the expectations of investors and regulators.

• DAOs may become more involved in DeFi.

• We may see some NFT-related trading pairs and yield products in 2022.

• Integration of DeFi and blockchain games.

Crypto Market Regulation:

• Smaller countries may take the lead in crypto market regulation.

• A standardized approach to regulating crypto assets is expected to emerge.

• Traditional finance will insist on fair competition in terms of regulation.

• Transactions involving on-chain smart contracts often fail to comply with basic legal concepts.

• There may be more interesting debates around NFT transactions and whether gaming profits should be taxed.

Venture Capital Firms:

• Established venture capital firms are now realizing that crypto is the next wave of technology.

• Investors will focus mainly on the Metaverse, Web 3, DeFi, NFT and blockchain games.

• Current Metaverse-related projects need to improve social features in order to attract greater investment.

• An important question remains: Will the growing involvement of venture capital funds in the crypto market make the SEC more inclined to consider crypto assets as securities?

DeFi Trends in 2022

Decentralized finance (DeFi) has seen phenomenal growth in 2021, boosting the growth of the broader crypto market, which in turn has influenced it. According to Defi Llama, the total value locked in the DeFi space now exceeds $240 billion.

DeFi is expected to continue expanding in 2022, and various sub-sectors within DeFi will also see considerable growth, from liquidity mining and yield farming to decentralized autonomous organizations (DAOs), decentralized exchanges (DEXs), and DeFi+NFTs.

Continued growth, new users

At the time of writing, the crypto market is in a slump. So an inevitable question arises: Can DeFi really grow this year?

Brad Yasar, CEO of lending protocol EQIFI, believes: "After 2020, the epidemic in 2021 still affects our daily life and ability to make a living, as well as the opening of global trade/financial markets. Therefore, most people began to seek to enter the DeFi field. In addition, as more and more traditional banks and financial services institutions realize that by adopting some DeFi protocols, they can develop faster and provide services to customers more efficiently, so we expect DeFi to be more widely adopted and continue to grow in 2022."

As Yasar said, the macroeconomic situation under the epidemic has caused many people to start to get involved in DeFi, which has significantly increased the capitalization of DeFi and crypto markets, and increased the participation of traditional financial institutions.

Similarly, Timo Lehes, co-founder of Swarm Markets, expects asset tokenization, regulatory clarity, and lower transaction costs to increase mainstream adoption of DeFi in 2022.

“Bringing more real-world assets and financial products, such as securities, to the chain will greatly expand the DeFi ecosystem and attract more investors and traders. DeFi provides more opportunities than traditional markets to earn returns from a wider range of asset types and give people greater autonomy.”

Other industry players expect DeFi to become popular among users beyond crypto natives in 2022. One of them is Rachid Ajaja, CEO of AllianceBlock, who believes:

“According to one survey, seven in 10 wealth advisors globally have had conversations with clients about crypto assets, and a Goldman Sachs survey showed that about 15% of family offices globally have some understanding of crypto assets. This was not the case a few years ago.”

DeFi Regulation Will Become a Reality in 2022

Ajaja also pointed out that one of the biggest obstacles currently facing institutional adoption of DeFi is compliance and regulation. Fortunately, DeFi compliance is expected to become a reality in 2022. For example, the EU's upcoming Crypto Market Regulation (MiCA) will have a significant impact on the DeFi field. In addition, the US SEC will strengthen its review, which requires DeFi protocols to improve their compliance.

“For DeFi protocols to meet these requirements and truly feel the benefits of regulation, effective cross-border regulatory cooperation and KYC/AML frameworks are needed. Centralized crypto exchanges and decentralized exchanges are in urgent need of these solutions, which will help provide compliant gateways for crypto assets. In DeFi, [know-your-customer, KYC] and [anti-money laundering, AML] solutions, wallets with built-in KYC will help DeFi increase institutional adoption in the coming year.”

Timo Lehes agrees that regulation will be key in 2022: "The good news is that some jurisdictions, such as Germany, have already made crypto assets compliant with existing securities laws. DeFi projects seeking to attract capital can find opportunities there. As conversations around crypto regulation turn into action in 2022, we expect to see a reshaping of the DeFi space to better meet the expectations of investors and regulators."

DappRadar CDO Dragos Dunica believes that the regulatory challenges facing DeFi in 2022 may be huge, but the sector is ready to meet the challenges.

“I think the DeFi space will do everything it can to legitimize itself and become a true competitor to CeFi [centralized finance].”

More and more products

Assuming the DeFi space is able to clear more and more regulatory hurdles in 2022, it will be able to offer users an increasingly rich range of products.

Timo Lehes believes: “In 2022, NFTs will evolve to represent assets with intrinsic value, and we will see some interesting products based on the composability of DeFi.”

Lehes believes: “I expect to see DAOs become a key theme in the crypto industry in 2022, along with investor protection, DeFi, and NFTs.”

One of the most successful projects in the crypto industry in 2021 was Axie Infinity, which saw its daily active users increase from 38,000 in April to 2.7 million in mid-November. The surge in users also triggered the growth of GameFi, of which DeFi is obviously a big part.

Dragos Dunica believes: "We have seen the success of Axie Infinity and Alien Worlds, so we expect the further rise of gamified finance and P2E mechanisms. Gamification has brought the number of users in the DeFi field to an all-time high, with more than 2 million active wallets in October. It is expected that DeFi and blockchain games will be further integrated in 2022 to provide users with interesting experiences."

Sections

While the above predictions cover the trends that may occur in DeFi in 2022, it is worth noting that the industry is currently in its infancy and is growing rapidly, so the most exciting thing is not what is predicted, but what is not predicted.

Crypto Market Regulatory Trends in 2022

As in 2021, 2022 is likely to see a variety of attitudes towards crypto assets from different countries, with some countries taking a favorable view (such as El Salvador) and others taking a tougher stance (such as China). However, some industry participants estimate that most of the regulations implemented in 2022 will be increasingly favorable to the industry as more countries and official institutions begin to recognize crypto assets.

Meanwhile, industry insiders say regulators will begin looking to regulate specific areas of the crypto industry in 2022, with stablecoins, NFTs and DeFi taking center stage. While some members of the crypto community may be alarmed by the arrival of more regulation, the introduction of investor safeguards could ultimately have a positive impact on the crypto industry.

Predictions and realizations for 2021

As early as November 2020, industry insiders predicted that the implementation of crypto regulations in 2021 would be fragmented. This is largely the case, and most countries seem to still be debating and consulting on crypto assets, but countries such as Ukraine, Cuba and El Salvador are exceptions.

Additionally, they believe that the United States will introduce comprehensive crypto regulations in 2021. While some states have introduced their own statewide bills, the federal government has been slow to make real progress.

Regulation may move toward more generous treatment

Skirmantas Januškas, CEO of DappRadar, said in an interview that the crypto industry is likely to continue to be subject to different regulatory measures in different countries in 2022. For him, this is mainly because crypto assets are usually driven by bottom-up demand.

“This bottom-up demand tends to be greater in countries with fragile economic models, high inflation or limited access to global markets.”

Ian Taylor, executive director of CryptoUK, expects differences in regulatory approaches to become more evident in 2022, with the main divide being between the East and the West.

“Western countries have not banned crypto markets where they see other countries actively banning them, suggesting that different regulatory stances may stem from the different uses of crypto assets we see in different parts of the world. For example, Bitcoin (BTC) is primarily used as an investment in Western countries. In Asia and other developing countries, use cases are more skewed towards payment instruments, especially remittances.”

As for which countries will implement new crypto regulations in 2022, Skirmantas Januškas believes that it will be smaller countries that will step up to attract crypto-related economic activity.

Although some countries may take restrictive measures on the crypto market, industry insiders estimate that the overall trend of regulation will be to accept crypto assets more while imposing safeguards.

Jan Stockhausen, Chief Legal Architect at Etherisc, believes: “As far as blockchain technology is concerned, I believe regulators will soon realize that the technical certainty of blockchain-based smart contracts can achieve the same results in investor protection and fraud prevention as compliance with regulations - sometimes without the need for regulations. Whether this will happen as early as 2022 remains to be seen, but industry insiders are working hard to educate regulators on the opportunities brought by blockchain technology.”

The evolving complexity of the crypto industry

As one of the specific areas of the crypto industry, stablecoins have attracted attention around the world, with the United States, the United Kingdom, and the European Union particularly committed to regulating stablecoins.

According to Ian Taylor, most jurisdictions are already fairly advanced in terms of policy development and many laws on stablecoins are likely to be passed by 2022.

“Effective stablecoin issuers in the UK will be considered electronic money institutions,” he said.

In the EU, the Markets in Cryptocurrencies Regulation (MiCA) will introduce similar treatment for stablecoin issuers as in the U.K. In the U.S., regulators have been quite vocal on stablecoins, with the President’s Working Group on Financial Markets stating several times last year that they need to increase oversight of stablecoins.

Besides stablecoins, another area that will receive attention in 2022 is NFTs, which now represent a multi-billion dollar industry and, like DeFi, it has become too big to ignore.

Skirmantas Januškas believes: “I hope to see interesting debates about whether NFTs are securities, whether transactions of in-game NFT items should be taxed, and whether income from playing games can be considered income. P2E-based blockchain games and gamified finance currently account for half of Dapp usage, and in countries such as the Philippines, their contribution to per capita GDP is enough to start these debates.”

Sections

The above predictions show that the crypto industry is not something that can be fully covered by just a few regulations. Given that it often transcends the limitations of traditional finance and law, it may take some time for lawmakers to fully develop regulations to provide the regulatory clarity that the crypto industry has been waiting for for years.

In other words, there may be some new regulations coming in 2022, but don’t expect the crypto market’s regulatory issues to be fully resolved within 12 months.

Venture Capital Trends for 2022

The crypto industry is very dependent on funding. Not only funding in the form of various token issuances and private fundraising that we have seen, but also indirect funding from investors purchasing crypto assets, thereby increasing the financial value of blockchain platforms and their developers.

We have witnessed the evolution of crypto funding over the past few years, with the initial token offering (ICO) waves of 2017 and 2019 gradually giving way to more traditional venture capital (VC). In 2021, many traditional venture capital firms and funds turned to crypto and blockchain, focusing on Web3 verticals such as the metaverse, DeFi, and blockchain games.

More venture capitalists are getting involved in the crypto market

2021 may have been a banner year for crypto assets in terms of market activity, but it was also a record year for more traditional venture capital.

According to PitchBook, venture capital funds invested about $30 billion in crypto and blockchain-related companies throughout 2021. That’s more than four times the previous record set in 2018 and more than all other years combined.

This breakthrough amount has created a new model in the industry, and the total amount of $30 billion also exceeds the record amount raised by ICOs in 2018 (approximately between $11 billion and $22 billion). Given that the SEC has sued Ripple for allegedly conducting an unregistered securities offering, more projects may seek investment from venture capital funds in 2022.

Mark Jeffrey, general partner at Boolean Fund and co-founder of Guardian Circle, believes: “Sophisticated venture capital firms now realize that crypto is the next great technology wave, just like the internet. They have to invest — they have no choice.”

“It would be catastrophic for a VC firm to miss out on the next Google, Amazon, or Facebook, especially when they have already missed out on Ethereum’s (ETH) ICO, which could be one of the biggest investment opportunities in history. Therefore, VC interest will certainly accelerate in 2022.”

Analysts working in the crypto industry agree that this year will see many traditional investment firms enter the crypto market for the first time.

“Yes, we will see more traditional funds entering the crypto world, especially family offices and wealth funds,” said Anndy Lian, chief digital advisor at crypto exchange BigONE.

Target: Metaverse, blockchain games, NFT, DeFi

Assuming that more traditional investment funds and companies will participate in the crypto market, what types of projects will they mainly target?

Kerner believes: “The metaverse is the hottest area right now, and this trend is likely to continue into 2022 and beyond. But the entire crypto industry is still in its infancy, and investment in every area should grow, including blockchain games, L1 and L2, DeFi, and NFT.”

Although Mark Jeffrey also hinted that the Metaverse will become the biggest target for investment companies in 2022, he believes that current Metaverse-related projects need to improve the social functions of the platform in order to truly attract the attention of big funds.

“If you go into the virtual world of Decentraland, you’ll see 500 to 1,000 people online — but none of them are interacting with each other. They’re all wandering around, looking at the scenery, and of course buying land and clothing accessories, but that’s it.”

Jeffrey predicts that unless it becomes more social, with people spending hours communicating online, as they do on social media platforms like Twitter and Facebook, this model won't be sustainable.

“I hope that some developers pay more attention to metaverse social media and one of these products will explode. Once it happens, it will create a huge opportunity of tens or even hundreds of billions of dollars for the NFT and crypto markets.”

Associated with the metaverse, blockchain games are likely to become another hot area for VCs in 2022.

Jeffrey believes: "Just like the success of Axie Infinity, the P2E gaming space seems to be huge. Even though the gameplay is not very good, it has become very popular."

Regulatory issues

An important question remains: Will the growing involvement of venture capital funds in the crypto market make the SEC more inclined to consider crypto assets as securities? Because as venture capital firms purchase native tokens in anticipation of platform growth, this does seem to satisfy the Howey test.

(The Howey test is used to determine whether a vehicle qualifies as an “investment contract” under the Securities Act: “a contract, transaction, or scheme under which a person invests his or her money in a corporation and is directed to receive profits solely from the efforts of the promoter or third parties.”)

For Anndy Lian, this is a difficult question to answer because it depends on several variables.

“Personally, the increase in the number of people investing in crypto assets does not necessarily mean that regulators will consider these investments as securities. It depends on the nature of the project, which VCs they get investment from, and finally where they build the protocol.”

Sources:

Cryptonews, Wikipedia, Beincrypto