Fintech in 2022 was buffeted by a cyclical sectoral downturn combined with a souring macro-economic environment. In part, the sector was a victim of its own success. After flying high and being one of the most heavily invested-in sectors for the past several years, it was only natural that values would come back down to reality and align with historical norms.

High valuations and market euphoria also come with opportunities for bad actors to con even sophisticated investors, or for companies with no real business to get funded. In 2022, we saw numerous examples of bad actors being exposed and businesses going bust, leading to value destruction and economic pain for investors. Given the high profile of recent bankruptcies and frauds, particularly in the crypto space, there is an ever-growing push for regulation.

I’m not gloomy on the sector. Far from it. Fintech is still in its adolescence and opportunities for growth and value creation are huge. There are incredible innovations on the horizon and the future is positive. But that’s my long-term view. What do I think will happen in 2023 given last year’s dismal market backdrop and the regulatory and consumer protection pressures in this space? Dear reader, here are my top 5 predictions for the fintech market in 2023:

1. It’s going to be a whole lot harder to fundraise

Obtaining funding in a souring market is very challenging and made more so for fintech businesses that last raised in 2021 through to mid-2022 at the height of the market. Valuations for well-known public fintechs are down significantly from their highs. In the private markets, the market dislocation is hidden until a company needs to get new funding. It is only then that the new reality of valuation compression comes to light. Whereas it may have been possible a year ago to raise at a valuation multiple of 20-100x revenues (sounds crazy, but this was the reality), this has been compressed significantly to multiples on average of 10 or less.

What this means is down or flat funding rounds will be more prevalent for privately held companies. I would also expect companies to put off getting funding for as long as possible to avoid seeing a realised valuation hit or to pursue non-equity funding, e.g., venture loans.

The funding that is given will be on stricter terms. Expect to see investors seeking more governance rights, limiting founders operational flexibility and seeking tighter cost controls. Management teams that have been used to running their companies as they pleased will have to adjust to this new reality if they need funding this year.

2. We haven’t seen a bottom yet for crypto

I’m a huge believer in crypto. Blockchain technology is here to stay, it’s increasingly being used in computing protocols and is helping to create long term efficiencies. Who wouldn’t use technology that helps them do things better and cheaper?

When it comes to crypto assets, it’s a bit more of a mixed bag. First off, it’s a huge space so I’ll focus this prediction on exchange tokens (e.g., Bitcoin, Ether, etc). Yes, there are real use cases to many of these, but they have also been used as a popular asset for speculation leading to huge booms and busts. With the retracement in values across the market we’re seeing this asset class take a pummelling. While values have stabilised recently (e.g., for Bitcoin at slightly below the highs for the last cycle at approx. $16.5k as of the time of writing) there is significant downward pressure to come.

If the general market continues to decline, expect Bitcoin and Ether to fall in value by another 30-50% from their current levels, before they start to rebound in late 2023 or 2024. This will be exacerbated if there are more large-scale frauds or bankruptcies in this space, which will lead to panic selling and create a negative feedback loop for valuations.

3. A spike in bankruptcies and acquisitions

This is a corollary of my first prediction and a reflection of the old adage, whatever goes up must come down. In the case of a market hangover after a raging bull market, the crash back down to earth will be particularly painful.

We’re now at a market inflection point where the easy money has stopped. Investors are still seeking returns but they are getting a lot more sceptical about where they put their money and at what price. Marginal companies that were able to raise funding during the bull market may find themselves forced to file for bankruptcy and there are many companies in the fintech sector, both big and small, that are likely on the verge of this.

In addition, the fintech sector includes many actors whose entire business models have revolved around riding a bull market and relying on increasing asset prices and low interest rates to keep their businesses afloat. The clearest examples of this are in the crypto space but it also impacts actors in areas like buy-now-pay-later, a sub-sector in which many businesses relied on the historically low government interest rates of the last decades to have a viable business model.

An alternative to bankruptcy is to get acquired and we can also expect to see more consolidation in the fintech sector in 2023 as stronger players acquire their rivals. In some cases, this may be down to pure luck. Companies that secured sufficient funds at the market peak to weather the coming storm are in a great place to make opportunistic acquisitions of their embattled rivals.

4. CBDC projects will accelerate

Governments across the world are locked in a race of regulatory and technological competition to co-opt cryptoassets for their national currencies. China has already launched its digital yuan. The EU, US and many other countries have announced studies on the feasibility of digital version of their own currencies. Central Bank Digital Currencies (CBDCs) allow for a variety of efficiencies versus traditional cash, including by speeding up settlement and ensuring traceability on a blockchain. For more authoritarian states, they also offer the prospect of additional state control and monitoring over citizens spending habits, likely desirable in China but less so in the West.

There are clear competitive drivers for nation states to develop CBDCs. Developing a CBDC keeps a national currency relevant versus cryptoassets that are gradually becoming more mainstream and, in particular, versus stablecoin projects that aim to be alternative forms of money. CBDCs can also be used as leverage in economic competition between countries, particularly for a state like China that would like its currency to supplant the US as the world’s reserve currency.

Expect projects in this area to accelerate in 2023. Even if major Western countries don’t yet implement their own CBDCs, we will see more countries announce they are considering them or actively working on developing them.

5. More regulation of fintech, particularly crypto

It feels like an easy option to make this prediction. More regulation, like death and taxes, is an inevitability. But, in 2023 with all the chaos happening in the fintech sector and the economy at large, I expect governments to be more focused on consumer protection issues and ensuring fair and effective regulation in this space. We are already seeing that in the crypto space with the passage of the Markets in Cryptoassets Regulation (MiCA) in the EU last year and the proposed Responsible Financial Innovation Act in the US (RFIA).

Expect a renewed push to enact the RFIA in the US and analogues to it, and MiCA in other countries across the globe. Also expect a broader push to mainstream regulation on areas of fintech that have the same functions and risks as traditional finance but aren’t regulated the same way or where retail consumers are heavily exposed and have been shown to face detriments. The crypto space will be a prime target of this, but that trend should also surface in other areas such as digital brokerages or buy-now-pay-later.

It takes time to pass new regulation or for a landmark court case or regulatory agency decision to be made. However, in the fintech space, there have been many such regulatory initiatives, cases and decisions percolating for the past several years. If 2023 proves to be a troubled year, we can also expect an acceleration in those efforts and new regulation to be passed, cases decided, or agency decisions made more quickly than otherwise would have been the case.