According to CoinDesk, digital finance technologies, such as distributed ledger technology (DLT), have the potential to transform the financial industry by improving operational efficiency and reducing costs. However, several key challenges must be overcome for DLT-based technologies and platforms to gain wider adoption. These include a lack of interoperability and standardization among DLT systems, a lack of reliable digital cash options, regulatory uncertainty, and technology risks.
In recent months, an increasing number of institutions have begun to engage with permissionless blockchain through pilot studies and real transactions. Many of these entities are drawn to Ethereum due to its extensive ecosystem of applications and networks. Ethereum's flexible design and multi-year plan for upgrades have made it a popular platform for digital bond issuances, with large institutions such as the European Investment Bank issuing bonds on the platform.
Asset tokenization, which involves converting assets like funds, real estate, or art into digital tokens using DLT, has gained traction in the past year. The total value of tokenized real-world assets on public blockchains has increased to $2 billion from $1 billion in the last 12 months, with Ethereum hosting the majority of these assets. However, the adoption of tokenization has been slowed by a lack of reliable digital cash options, leading market participants to settle transactions off-chain or use stablecoins.
Two forms of digital cash that could address the current vulnerabilities of stablecoins are tokenized bank deposits and central bank digital currencies (CBDCs). Moody's expects the development of these digital cash options to continue in 2024, although their interaction with public blockchains remains uncertain. Legal clarity is also expected to improve in 2024 as regulators develop frameworks to support new digital assets and services. Regions such as the EU, Singapore, and the UAE could attract new investors due to new customer and investor protections and licensing regimes for digital assets, while the U.S. may continue to use regulatory enforcement actions to establish legal precedent within the digital asset marketplace.
