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Observers Annual Review

What a year it has been. The crypto industry entered 2023 battered and bruised, still dealing with the fallout of the FTX collapse, although Sam Bankman-Fried had managed to buy his way out of prison (temporarily, at least) with a $250 million bail bond. The FTX drama hit as the industry was still recovering from the Terra/Luna scandal earlier in 2022, which saw founder Do Kwon flee the authorities and go on the run in a bid to keep himself out of jail. So the start of 2023 felt distinctly chilly as we endured a deep crypto winter.

12 months later and the industry looks in much better shape overall, although that will provide little comfort to the former crypto kings: SBF is back behind bars after a high-profile trial (and may well spend the rest of his life there), and Do Kwon was captured in Montenegro using false documents and now faces likely extradition to either the U.S. or his native South Korea. Even the formerly untouchable Binance (ex-)kingpin, CZ, has admitted money laundering charges as part of a $4.3 billion deal with the U.S. DoJ and has been barred from leaving the country until sentencing.

The thawing of the crypto winter has also happened despite the continued efforts of U.S. authorities to put a damper on the crypto party. Notably, the SEC recently boasted of its "highly productive and impactful year" of crypto enforcement, although many would disagree with its assessment. Despite starting high-profile legal actions against Binance, Coinbase, Kraken, and pretty much anybody else relying on a blockchain for their business model, the regulator suffered a major defeat in its longstanding case against Ripple, when a judge ruled that electronic sales on secondary exchanges did not count as securities.

The U.S. Court of Appeals ruled that the SEC had been "arbitrary and capricious" in its refusal to approve a spot bitcoin ETF application by Grayscale, and even Congress demanded an end to its anti-crypto crusade. Towards the end of the year, chair Gary Gensler was labeled incompetent (and worse) for his inconsistent views on crypto regulation, and the TradFi industry is almost certain that one or more of the several outstanding spot bitcoin ETF applications will be approved imminently.

The general sentiment of the U.S. authorities towards crypto extended beyond just the SEC. March saw the collapse of three 'crypto-friendly' banks, after a joint anti-crypto campaign from the Federal Reserve, Treasury and FDIC. Later in the year, some U.S. Senators started their own attack on a number of industry participants after a misleading report suggested that crypto was responsible for a massive amount of terrorist funding. The report was later debunked, but try telling that to Senator Elizabeth Warren.

The rest of the world, however, has been rushing to implement clear regulations for crypto in the hope of attracting some of the talent that the U.S. is so clearly trying to force out. Hong Kong, the United Arab Emirates, France, and the United Kingdom were among those staking their claim to become the next global crypto hub, with the latter suggesting that it already held this accolade, despite a serious problem with crypto debanking.

CBDCs have continued to dominate discussions about the future of financial sovereignty. Pilot projects have been undertaken in countries including Thailand, China, and Kazakhstan, and work is in progress on CBDC development in even the smallest of countries around the globe. The European Central Bank seems to be tying itself in knots with its plans for a digital euro, however, as its insistence on preserving the profits of the big commercial banks is leading it down a path towards a CBDC that fails to serve those that most need it.

Technical advances have seen a wealth of innovation across the industry, with Layer 2 solutions coming to prominence throughout the year, including Coinbase's very own Layer 2 network, Base, which brought us a heady mix of meme-token rug pulls, novel social platforms and a music streaming service on its way the fastest growing L2. Solana also saw increasing interest thanks to a number of innovations from developers on the platform and a steady flow of airdrops. And Ethereum implemented its Shapella upgrade in April, allowing users to finally withdraw staked ETH. The next upgrade, Dencun, will introduce proto-danksharding, with testing expected to begin next month. Artificial Intelligence entered our lives very early this year and inspired many crypto-AI cocktails, while Sam Altman co-founded Worldcoin project with biometic ID.

The NFT market has reinvented itself somewhat this year after a fall from grace in 2022. Big brands continue to enter the space, even if some (we're looking at you Game of Thrones) didn't particularly make much of an effort. However, the headline-grabbing (and often eye-watering) prices of old have been largely replaced by more accessible collections, offering something for even the most casual fan. Even the Bitcoin blockchain got in on the digital collectibles action this year, with the introduction of Ordinals and Inscriptions, although not everybody was happy with the increase in network traffic and transaction fees that brought. NFT marketplaces have also been big business this year, with a 'race to the bottom' on fees seeing creator royalties hit an all-time low. This disappointed some parties, including Yuga Labs, which left the OpenSea marketplace and promised to create their own Royalty-honouring version... well, they don't want to lose out on those BAYC payments.

NFTs were used for everything from commemorative baseball tickets to K-pop band management and Croatian pig meat, and of course, Web3 gaming. Blockchain gaming feels as though it is on the cusp of the big time, with a pivot away from the 'more blockchain than game' experiences of the first wave, to a slew of AAA games on the horizon. A number of tools were released to make implementing Web3 functionality easier for game developers, and onboarding easier for players. Predictions for the future of blockchain games are currently incredibly positive.

Of course, the year also had its fair share of hacks and scams, an acceleration of institutional adoption and a push for the tokenization of real-world assets (RWA). We hope that you are as excited as us to Observe what 2024 will bring, on top of the Bitcoin halving event that we already know about. Happy New Year.