Madeleine Boys, Director of Programmes and Innovation at Global Digital Finance, reports on policy and consultation updates from around the world.
In the fast-evolving world of digital finance, 2024 is shaping up to be a landmark year for digital assets. In the midst of the buzz of new partnership announcements, use cases, and proof-of-concepts (PoCs) coming to market, keeping up with industry headlines can be challenging. Yet it is important to consider what this flurry of news means for the bigger picture of digital evolution and mass adoption.
To bring some data-backed intelligence to its members and the global financial services community at large, Global Digital Finance (GDF) commissioned independent research company PureProfile to interview 100 senior executives at financial institutions in Europe, the Middle East, Asia and the US. These organizations collectively manage around $221.75 billion worth of assets. They also sought to tackle the question: what is the state of the institutionalization of digital assets in 2024?
The findings? Institutions are not just interested in digital assets – they are diving in headfirst.
The bigger picture? Tokenization has moved from PoC to production, and the digitization of the economy has begun in earnest.
Digital assets and tokenization have moved from a fascination for innovators and digital natives, to the core of many financial institutions’ operational and short-term business strategies.
Nearly 80% of major financial institutions are now building dedicated teams to develop digital asset strategies, and investing heavily in staff training and development to foster this expertise. This investment isn’t just about keeping up with trends for these players; it’s about leading the charge in a new financial era. Institutions are reorganizing internally and investing heavily in staff training to build the necessary expertise to keep with a future of financial services that is digitized.
Consider Larry Fink, BlackRock’s CEO, who has championed the transformative potential of tokenization, famously stating that “the next generation for markets, the next generation for securities, will be tokenization of securities and real-world assets”. His insights echo the sentiment of many industry leaders who see digital assets as part and parcel of the future of finance, and distributed ledger technology (DLT) as an inevitability, not just a possibility, to deliver faster, cheaper, and more efficient financial services.
One of the standout findings of the GDF survey speaks to the adoption of real-world asset (RWA) tokenization moving mainstream. A striking 91% of financial institutions claim they are already handling tokenized assets such as corporate debt, alternative funds, and sovereign debt. Even more striking, the remaining 9% intend on doing so in the shorter-term.
A recent McKinsey report estimates that around $120 billion is already tokenized in the form of stablecoins, indicating the extent to which institutions are already leveraging at scale the efficiency and transparency offered by DLT. There are several reasons why institutions are betting big on digital assets:
Faster Settlement and Lower Costs: Tokenizing financial assets could help improve transaction efficiency and settlement times, reduce intermediaries in the process, and improve liquidity as a knock-on effect. This efficiency is a game-changer for institutions looking to streamline operations and cut costs.
Transformative Potential and Market Confidence: Whilst the efficiencies and cost savings that tokenization promises may vary by asset class, the implications they have for large scale and mature markets, like US public equities and US Treasury securities markets, which collectively represent over $75 trillion, are undeniable.
Real-World Use Cases Coming to Market: The pace of new digital asset use cases and partnerships is accelerating at pace, and at a pace that even sceptics may find challenging to deny. J.P. Morgan, HQLAx and Ownera’s DvP repo demo, HSBC’s $750 million digital green bond issue, and BlackRock’s tokenized Money Market Fund (MMF) all exemplify the growing use and application of digital assets. These initiatives demonstrate the practical benefits and real-world applicability of digital assets, making a compelling case for their broader adoption.
While digital assets and tokenization are an attractive promise to modernize and simplify much financial market infrastructure (FMI), the path to digital FMI (dFMI) and their widespread adoption is not without obstacles.
Regulatory uncertainty continues to loom large, presenting significant challenges for institutions aiming to integrate digital assets into their operations. SAB121 is a notable example in the US posing as a digital asset tax for institutions who would be required to mark digital assets – cryptographically issued or not – as liabilities on their balance sheets.
Lawrence Wintermeyer, Forbes Contributor, recently noted industry engagement with regulators and policymakers has been a critical factor in driving positive innovation on the US’ legislative agenda – and this sentiment can be echoed across many other jurisdictions.
Given the still evolving regulatory landscape, it is crucial for industry and the public sector to collaborate and work towards proportionate and appropriate frameworks which both foster responsible innovation, but also encourage best practice and high standards across the whole of the ecosystem.
As industry continues to move towards mass adoption, the GDF survey paints a clear picture: 2024 is the year digital assets go institutional. With major financial institutions leading the charge, the digital assets sector is poised for unprecedented growth and innovation. A recent Fidelity report supports this, reporting that 74% of institutions now have digital asset exposure, up from 58% in 2022, and this is only poised to grow year-on-year.
As institutions roam further into the realm of digital assets, they are forging paths with new technology players to create a prosperous and innovative ecosystem built on resilient dFMI and supported by the governance of appropriate, robust, and clear regulatory frameworks, to drive the mass adoption of digital assets.