Investors See a Bright Future for Crypto. But Regulation and Tighter Fed Policy Loom.

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Bitcoin
appears to be ending the year in a funk. Rising interest rates and tighter liquidity in financial markets aren’t great for risky assets like crypto. But investors are still betting that digital assets and their blockchain technology will soon become ubiquitous.

“In the near future, you may use blockchain technology to buy a stock, house, or fraction of a Ferrari, or even pay for gas or pizza,” says Alkesh Shah, head of digital asset strategy at Bank of America Securities. “Digital assets are going to be the bridge between the real and virtual worlds.”

The technology is developing rapidly, and we’ll see more uses from more issuers in the next year: While Bitcoin dominates the market, digital assets are expanding well beyond the first generation of cryptocurrencies. New categories include tokens for gaming, payments, and distributed file storage. Also burgeoning are non-fungible tokens, or NFTs, which can be used for fractional ownership of art, music, videos, gaming, or even real estate. The technology enables just about anything to be tokenized—from a pair of prized sneakers to a deed on a house. Companies like

Coinbase

Global (ticker: COIN) are building revenue streams around NFTs. Bitwise Asset Management recently launched an NFT index fund, and more funds are almost certainly coming next year.

Perhaps the biggest unknown is whether Washington will tap the brakes. Crypto hearings in Congress exposed a wide gulf between Democrats and Republicans on how to regulate exchanges, digital wallets, and other parts of the market. The low-hanging fruit for regulation is likely to be stablecoins—tokens designed to maintain a fixed $1 value. The Biden administration wants coin issuers like Circle and Tether to be overseen like federally insured banks. Agencies are being tasked with more oversight. At the least, coin issuers may need to increase disclosures and provide more assurances that investors can redeem tokens for cash in a market panic.

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Write to Daren Fonda at daren.fonda@barrons.com