Digital financial technologies offer much transformative potential. Distributed ledger technology (DLT) – of which blockchain is the best-known example – is driving the issuance of digital bonds, which could eventually reduce the need for intermediaries in the issuance process, improving operational efficiency and potentially reducing costs. DLT also underlies the tokenization of real-world assets, which could increase the accessibility of certain instruments.
However, to make these potential benefits a reality and gain broader adoption, DLT-based technologies and platforms will need to overcome several key hurdles, including a lack of interoperability and standardization between DLT systems, a lack of reliable digital cash options, and a lack of reliable digital cash options, according to Moody’s. regulatory uncertainty and technological risks.
This post is part of CoinDesk “Crypto2024” predictions package.
In recent months, more and more institutions have begun to engage with permissionless blockchain through both pilot studies and real transactions. Many of these entities are leaning toward Ethereum given the extensive ecosystem of applications and networks that have developed their own user bases and product offerings in recent years. As an open-source public blockchain, Ethereum provides a blockchain base layer on top of which developers can build solutions for sharing data and value across other networks.
Ethereum’s flexible design and multi-year plan for upgrades, including upgrades that will improve interoperability, have made it a popular platform for issuing digital bonds. Major institutions such as the European Investment Bank have issued bonds on Ethereum, which was also the blockchain underlying Moody’s 2023-rated digital green bonds, a €10 million senior unsecured digital green bond issued by Société Générale. According to Moody’s, public blockchain networks such as Ethereum and traditional infrastructure will become more connected over time, which will improve blockchain use cases and fuel industry growth.
Asset tokenization – converting an asset such as a fund, real estate or art into a digital token, making it storable and transferable using DLT – has gained traction in the past year. The total value of real-world tokenized assets on public blockchains has increased from $1 billion to $2 billion in the past twelve months, and Ethereum currently hosts the vast majority of them. One factor slowing the adoption of tokenization is the lack of a reliable form of digital cash, which has led market participants to settle off-chain transactions or use stablecoins.
Stablecoins, a cryptocurrency whose price is pegged to a reference value such as fiat money, are a form of digital cash, but under tense market conditions, stablecoins have not always maintained their peg. Two other forms of digital cash that could address the current vulnerabilities of stablecoins are tokenized bank deposits and central bank digital currencies (CBDCs). The development of tokenized bank deposits and CBDCs will continue to progress into 2024, according to Moody’s, although the extent of interaction with public blockchains is still unclear.
According to Moody’s, legal clarity is also likely to improve in 2024 as regulators make progress in developing frameworks to support new digital assets and services, although not all regions are progressing at the same pace. Regions such as the EU, Singapore and the UAE could all attract new investors as a result of new customer and investor protections and new licensing regimes for digital assets. The US, meanwhile, will likely continue to use regulatory enforcement actions to set a legal precedent within the digital asset market, as developing a digital asset framework in the US remains a more distant goal.
