From fringe to future: why digital assets hold the key to the future of finance
Up until recently, digital assets have been perceived with a degree of hesitancy from traditional financial institutions and governments across the world. Yet as new use-cases prove their merit and the underlying technology (blockchain or DLT) becomes more accepted, institutions have started to incorporate digital assets into established processes. Singapore is currently at the front of the pack when it comes to experimentation, but this process can be accelerated further with concerted effort from government bodies to drive legitimacy and adoption.
While cryptocurrencies are the native asset of a blockchain (for example, Bitcoin), tokens (like NFTs) are created as part of a platform that sit on an existing blockchain. The decentralized nature of the blockchain systems which underpin digital assets gives them immutability, security and transparency, qualities that lend these assets to a host of use-cases.
As a result, digital assets have cemented themselves as a central component of the future of finance. The global market capitalization of cryptocurrencies reached more than $2 trillion in August 2021, double what it had been at the end of 2020. This represents approximately around 20% of the global market cap of gold – the predominant reserve asset for the world’s currencies.
Revolutionizing the future of finance with far-reaching functionality of digital assets
However, unlike gold, the success of cryptocurrencies is not predicated purely on their utility as a store of value. It is the broad functionality of digital assets that is revolutionizing financial markets and accelerating their uptake. As a result, everyone from established institutions to independent investors are exploring ways to leverage the benefits.
While cryptocurrencies may be in the spotlight, digital tokens are the real transformative heroes that are revolutionizing the financial sector, removing the inefficiencies of legacy systems and creating new streamlined and secure processes.
For example, take the issuance of securities. A tokenized economy presents the opportunity to reduce much of the friction involved in this costly and time intensive process. Tokenizing assets allows greater liquidity, especially when used with illiquid assets like art pieces.
In addition, tokens are transacted via instructions contained within smart contracts, meaning that most of the exchange process is automated. This removes much of the administration involved in buying and selling, removing many intermediaries, and resulting in faster transactions with lower fees.
Data embedded within digital assets not only helps automate processes but helps develop trust and accountability. As the rights and responsibilities of a token-holder can be embedded directly onto the token providing an immutable record of ownership, blockchain-based assets are far more transparent than those used in traditional financial systems.
Finally, the ability of digital assets to enable fractional ownership is making investments more accessible than ever before. Tokens are highly divisible, which means investors are now able to purchase smaller percentages of assets at lower costs. This increases liquidity and accessibility within markets that are traditionally exclusive only to those with the financial means to participate.
Delivering transformational change
The use of digital assets with securities such as bonds and fund shares has already been shown to enable faster, easier, and most cost-efficient issuance. According to a recent BNY Mellon study, 72% of institutional asset managers said they plan to develop solutions for asset tokenization, with many exploring the creation of completely new types of securities.
What’s exciting is the speed at which this technology is being leveraged beyond legacy systems. If 2021 demonstrated a variety of use-cases for tokens, for example, the use of NFTs in real estate and art, 2022 will expand the concept of value stored within a digital asset as they will be applied to a far wider range of tangible and intangible assets. From industrial goods to metaverse property, we will see digital assets incorporated into all aspects of ownership, both physical and digital.
However, the unfolding benefits of digital assets cannot be enjoyed in a vacuum, which is why governments and organizations must collaborate to develop ecosystems that enable digital assets to thrive. In Asia, the Singapore government has made moves to embrace the potential of tokenization in its efforts to become a leading player in a future where economies move towards decentralization. The Monetary Authority of Singapore (MAS) has taken an active role in the development of the industry, implementing strong regulations to encourage growth, while at the same time addressing potential risks.
Yet to truly unlock the power of digital assets, governments will have to look beyond their borders to imagine how digital assets will be instrumental in underpinning new global financial systems. It is clear that traditional forms of cross-border transactions will soon be redundant in a digital age. In their place, blockchain-based digital assets will provide secure and efficient new ways of operating. Beyond national legislation, governments need to think about how they can connect microcosms of crypto innovation and encourage international collaboration.
An Accenture survey found that blockchain technology could bring down the average cost of clearing and settling transactions by US$10B annually. To this end, Project Dunbar, which MAS is a part of, is exploring the use of tokenized digital currencies to transform international settlements through a common platform to streamline cross-border payments.
To pivot successfully from traditional financial powerhouse to the leading player in digital finance, Singapore needs to actively manage this transition, fostering an innovative ecosystem of traditional institutions and fintech players that exist in a well-regulated, progressive framework. On a macro level, Singapore stands to benefit from promoting a consistent approach to digital assets across the globe, so that it can lead the way in establishing the international framework that will accelerate global adoption of digital assets. By creating the blueprint for tomorrow’s financial systems, Singapore can lay the groundwork for its future success.