Not every digital asset would be treated as severely as cryptos and not all of them will become the future of money. Today, we are living in a time where digital assets are moving continuously towards mainstream adoption. From the retail clients to the traditional banks and many other financial service providers, the digital assets are on the surge.
Most of the assets promised to disrupt the financial markets and huge incumbents, and while they have got massive attention, they are yet to achieve their potential. With that said, many huge institutions are taking notice, 86% of the world’s central banks are now exploring digital currencies, as highlighted in a report by the Bank for International Settlements (BIS).
They recognize that despite existing in a golden age of innovation, payment systems remain somehow archaic. Thus, there is no reason why the current payment systems will not follow a similar trajectory to sectors that have been transformed by new technology in the past ten years.
In general, the world we live in is now digital. Hence it makes sense that money and assets need to follow suit. But how realistic is this in the coming five years? Will the technology and type of digital assets appear the same?
Big Organization Are Starting Their Digital Assets Journey
Institutional interest in cryptos continues to grow. Goldman Sachs surveyed more than 300 of its high-net-wealth clients, finding that 40% of them are so far exposed to cryptos. In recent months, Spain’s second-largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), announced that it will launch a BTC trading service for private banking clients in Switzerland, while Citigroup is considering offering trading, custody, and financing services.
Apart from the banks, payment companies like MasterCard and PayPal are getting involved with cryptos by accepting payments for their clients. Then there are central bank digital currencies (CBDCs). The providers of infrastructure are trying to position themselves as ready for CBDCs.
SWIFT and Accenture recently published a joint report that outlined how it could work as a possible carrier of CBDCs, should they become a reality. Also, central banks throughout the world are exploring CBDCs and striving to safeguard public trust in payments and money. The retail and wholesale CBDCs can do this by providing the unique features of liquidity, finality, and integrity, while also offering security.
For instance, the most promising CBDC design would be tied to a digital identity, needing users to identify themselves to access money. The new venture fosters innovation that serves the public interest.
Nonetheless, it is still the early days for the development of cryptos, CBDCs, and other forms of digital assets. There is an almost unanimous view that the assets need to become more standardized, secure, and robust before entering the mainstream.
Regulators Are Taking Notice Of The Change
In the coming years, digital assets might face intense scrutiny from the financial regulators and central banks before they are let to function as a form of secure payment. That is to be expected. Anything that might affect the smooth functioning of the international monetary and financial system will expectedly encounter hurdles put up by its gatekeepers and those who are responsible for its security and operations.
For instance, the primary global banking standards-setter, Basel Committee on Banking Supervision, has been seen to increase capital needs for the banks with exposure to volatile cryptos to reflect higher risks and financial stability worries.
Under these proposals, banks might be needed to hold capital equal to the exposure they encounter. Thus, a $100 exposure to BTC would need a minimum capital need of $100.
This characteristic may put the regulated financial institutions off from involving themselves or extending their existing crypto services. For instance, while BBVA has already launched trading services into Switzerland, they have decided to hold off from other markets as the regulations are not clear and even not standardized.
With that said, not all digital assets may be treated as severely as cryptos under these proposals. Stock tokens and stablecoins may fit into modified existing rules on the minimum capital standards for the banks, possibly making them an ideal option.
Cryptos At Crossroads
Today, crypto remains volatile, and stablecoins, on the flip side, provide a more transparent, secure, and stable option. Many proponents believe in their potential, mainly due to their quick settlement speeds. By including data into these coins, money becomes linked to what it pays. That offers lots of automation possibilities, making it a strong contender.
Maybe the most likely type of digital assets that the global economy will adopt, nonetheless, are CBDCs, which are issued and controlled by central banks. Considerable and exhaustive testing has taken place so far, and that type of digital asset would guarantee strong supply, governance, and regulation similar to what is the case with fiat currencies currently.
For most of these digital assets, buy-in among the end-users, huge corporations, SMEs, and individual consumers, will be critical to determine their success. Eventually, success will be measured in decades not a few years.