The Future of Digital Assets: Not a Zero-Sum Game

Blockchain technology and digital assets rose to new heights in 2021; with a record $30 billion in investments, interest in this sector of FinTech has never been stronger. But what’s happening with all that money? That was the subject of 1871’s recent Tech Talk: Digital Assets and Cryptocurrency: A Breakout Year, with experts weighing in on where developments in digital assets are headed over the next few years.

It’s a broad topic – from cryptocurrencies to tokenized securities and CBDCs. Digital assets incorporate a wide range of very different technologies set to different purposes, whether on the bleeding edge of tech startup product development or increasingly within traditional financial institutions. The blockchain draws them all together – data wrapped in smart logic to drive efficiencies.

“That’s Web 3.0 – the semantic web,” said Arijit Das, who heads up Northern Trust’s Digital Asset Innovation technology group. “The data is free, distributed, and there’s logic with the data that allows you to determine its purpose.”

For traditional institutions like Northern Trust, that logic is ultimately served in building bridges between traditional financial systems and new ones. After all, whatever the innovations, traditional banking tools aren’t likely to go away anytime soon. But how can the blockchain make them work more efficiently while also enabling new products?

“We’ve launched a couple of products, first in the private equity space, that brought blockchain to that space,” Das said. “We had a product in the last year that launched in Singapore where we take whole bonds we have custody of and express them as tokens on a regulated exchange there. They’ve fractionalized the bonds, so a wholesale bond can be bought and sold by retail investors.”

Harnessing Blockchain Technology as a Revolutionizing Tool

That harmony – blending new technology into traditional regulated assets – is key to the strategy being taken by the financial institutions. It’s also no less revolutionary for their roots in an older way of doing business.

“I think blockchain technology is going to revolutionize the whole securities business from a clearance and settlement perspective,” said Lilya Tessler, Partner and Head of Sidley’s FinTech and Blockchain Group. “I don’t see why we can’t get to instantaneous settlement for securities transactions – we do it for cryptocurrencies.”

It’s an innovation that’s already arriving – the Boston Options Exchange (BOX) recently got SEC approval for a joint venture with crypto tokenization firm tZero for the Boston Security Token Exchange (BSTX), which will use its Market Data Blockchain product to offer ideally instantaneous settlement transaction and other new blockchain-powered solutions designed to improve trading while democratizing access to other companies and assets.

They’re not alone. Several exchanges are looking into the idea of expanding the regulated exchange. Some are even looking into the potential for products like ETFs and DeFi opening up a much broader investment market to individuals without the need for a brokerage intermediary.

“To do this for retail is very intense from a regulatory standpoint, but it’s happening,” said Renata Szkoda, Managing Director and Chief Financial Officer of Galaxy Digital’s Blue Fire Capital Europe. “People are working day and night to develop these stacks, these different solutions for trading, for lending, for staking, for yield farming – and any of us will have access to be our own investor. Maybe all these brokerage firms will exist on the side, but we’ll have the option to do this on our own. And I think that’s really exciting.”

That regulatory process is ramping up. Governments worldwide are finally beginning to wrap their heads around exactly what this technology entails and what it can do. There’s still a long way to go, however, especially as that regulation can still be frustratingly opaque. It’s not that cryptocurrencies, for example, are unregulated. Rather, it’s knowing exactly who has jurisdiction over which product.

The SEC claims jurisdiction over securities, which cryptocurrencies are stated to fall under. However, they can also be thought of as commodities, which brings in the CFTC. The banking regulators, too, are staking their claim as more and more crypto firms enter the realm of traditional financial services.  And still, others step in case-by-case all the time.

“Most recently we’ve seen public statements from the Consumer Protection Finance Bureau regarding their jurisdiction on enforcement for products offered to consumers,” Tessler said.  “We’ve seen the Federal Reserve put out guidance – and their focus is on Federal Reserve-regulated banks, but also they’re the ones considering whether the government should be offering a CBDC. With bitcoin being used as a form of currency, various senators and congressmen have been very vocal about the need for more regulation regarding the use of these things as currency. And then there’s a lot of overlapping regulations for stablecoins, especially emerging over the last year.”

That lack of clarity is probably the last big hurdle for the blockchain to overcome before it can be thought of as truly ubiquitous across the industry.  From NFTs to DeFi and beyond, the rules may exist – but they are not always well-understood.

“With NFTs, there are huge applications we can’t even think of,” Das said. “But the regulations are not clear. There’s a lot of opaqueness as to what is regulated, who regulates it, how it’s regulated, and until that’s cleared up there won’t be a lot of investment into it. People want to know what the rules are, and until we can clarify it for NFTs, it’s going to be at the periphery of institutional investments.”

That will be equally true for DeFi investments, with consumer protections vital to prevent an unprecedented level of individual control over investment from becoming too much of a double-edged sword for retail consumers.

What Will the Future Look Like?

The march forward seems inevitable, now, as investments continue to grow year over year. We continue to approach a future where digital assets are becoming a norm, and instantaneous settlements are becoming a simple expectation of doing business. It’s past time for institutions to get on board – as many already have.

“I don’t think there have to be any losers in this space,” Das said.  “It’s not a zero-sum game. What the middlemen and the custodians do may be different, but if you step out at a macro level, this is bringing efficiencies into the system. This is reducing overhead costs in the system, enhancing the ability for the end-user to interact more directly, and the pie is growing. We just have to do it right, and we can all win.”

— Jessica Purdy