2024: The Year Cash Is Back?
In 2023, we predicted a year of efficiency focus for DLT projects. This consolidation ended up being accompanied by regulatory efforts to recognize digital assets as a legal concept. In 2024, we expect this momentum to diversify digital assets and introduce more activity by commercial banks in CBDC projects.
We expect 2024 to be DLT’s behind-the-scenes year. It will be a year of laying down new financial rails to support the market’s expanding variety of digital assets while making peace between different actors in the financial ecosystem. A key outcome of this activity is likely to be more live CBDC issuances globally, which is reflected in the title.
Three trends in particular lead to this prediction:
Trend 1: Higher interest rates differentiating sentiment about tokenization
The higher interest rate environment should reduce demand for riskier assets, like, say, cryptocurrencies. And yet data suggests that the cryptocurrency market cap has increased despite higher interest rates. Part of the reason may be the market belief that inflation will stabilize in 2024 and 2025. Rather than inducing a flight from risk assets, the macroeconomic environment and a maturing DLT market have resulted in a middle path where DLT is used to provide new functionality for existing assets. The result is considerable positive attention being showered on tokenized real-world assets (RWAs), which represent more familiar asstes like gold or securities.
The expansion of RWAs impacts the financial sector by allowing more actors to interact with tokenization. RWAs use an asset recognizable to compliance officers, consumers, and the market. Recognition is an under-appreciated feature of scalability. It also solves a problem faced by similar assets that are only traded in the DeFi space: regulated institutions cannot engage actively with them. Yet there is demand because of the gains in efficiency to be made. As BIS points out in a report about China where 5% of the asset-backed securities market is issued on blockchain, on-chain ABS tokens have a smaller yield spread.
In the end, we expect growing interest in RWA tokenization to expand the use of tokens in capital markets and impact the geography of digital assets. Where capital markets regulators have been most active in allowing capital markets actors to experiment with tokenization, activity has grown quickly – for example, in the UK and EU and now the Middle East. In the case of Switzerland, regulatory clarity around digital securities resulted in the first digital native bond issuance in 2022, expanding to 5 digital bonds today, with a combined issuance volume of US $910 million. If RWA continues to expand, we will see increased demand for CBDC or other on-chain settlement instruments.
Trend 2: Central banks taking the bet on cash
Most indices show declining worldwide cash usage. Despite what appears to be a nearly universal preference to not use cash, 130 countries are actively experimenting with CBDC, up from 35 in 2020. This trend shows no sign of falling off in 2024. And it is no longer an emerging economy activity, as 19 of the 21 G20 members are also experimenting with CBDC.
The claim that CBDC is a bet on cash is an obvious overstatement, but is meant as a reminder that CBDCs are interesting because they share a key common characteristic with cash – issuance by a central bank. If you’re an institution that is responsible for financial stability, and you just experienced a few years of pandemic, supply chain disruption, and the collapse of both FTX and SVB, you might very well consider exploring new instruments that bolster your influence. While cash inherently has the lowest risk profile in an economy, convenience has pulled many retail users to digital payments, which are run by the private sector.
There is also demand for a CBDC on the wholesale side. Driven by the maturation of tokenization across capital markets and a shift to faster settlement times, large corporates and banks are also seeking a form of central bank money that is natively digital.
If we think of CBDC this way, it makes some interesting statements about what the financial system will look like in 2024. First, retail CBDC will function as a distinct new payment rail for issuing countries. This is likely to introduce competition while complementing existing payment rails by providing a new interchange regime and potentially a fresh customer base. Second, we expect to see more activity around wholesale CBDCs issuance, particularly in jurisdictions where there is regulatory clarity around digital assets. Third, many experiments include a cross-border component, which introduces considerable policy challenges but also promises to move the conversation about remittances and cross border flows in a more digital direction.
Trend 3: Multilaterals adjusting support for financial sector innovation
Over the past few years, multilateral institutions have received an increasing number of new requests for advisory services around digitalization and CBDCs in particular. The IMF reported over 40 requests for advice between 2020-2023. This is nothing new for multilaterals who are in the demand-driven business of advising member countries. CBDCs can’t operate in a vacuum.
What is interesting about this increase in requests for advice is that it has led to some very real changes in their activities. For example, the BIS has rolled out eight innovation centers since 2019, when it began with 3 centers. The number and depth of projects undertaken by these centers have also increased. In 2023, 12 projects have been completed, and 8 are ongoing. 2024 will add at least 6 new projects to that list. The IMF recently rolled out its CBDC Virtual Handbook, a longer-term project intended to be drafted and revised over time.
These expanded activities remind us that the global financial system belongs to everyone and no one. Maintaining financial stability is a particularly difficult job when countries across the globe are experimenting with new technology all at the same time. With ramped-up guidance from trusted multilaterals, 2024 will witness more directed collaboration among governments, regulatory bodies, and other public entities in the CBDC ecosystem.
What’s in store for 2024…
As we go into 2024, these three trends are all sources of pressure for digitization. They go along with rising volumes in capital markets, the switch to T+1 settlement in the US this year, and other indicators that the demand for faster transactions continues. However, one additional trend indicates a potential challenge to everything here. Commercial banks have been actively involved in tokenization and digitalization. But when it comes to CBDC, only some regions have actively engaged with commercial banks. There has been excellent public/private cooperation on CBDCs, in countries like the UAE or China where banks are conducting live cross-border transactions. It is that kind of collaboration that ensures technical and policy decisions reflect the wider goals of all stakeholders.