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Digital assets - Beyond the hype

Will digital assets transform financial markets, or be a much-hyped sideshow? Some commentators suggest that tokenised assets could expand investor access to markets, improve liquidity and enhance price discovery. As often described by the market, distributed ledger technologies (DLTs) (such as blockchains) and embedded smart contracts may also offer the prospect of faster, cheaper trading and settlement. Despite these potential benefits, the road from concept to real-world application of such technologies has so far often been rocky, but are we now reaching an inflection point?

A difficult 2023 for DLT

After more than a decade of fevered excitement around digital assets and the transformative potential of the underlying distributed ledger technology, 2023 marked a return down to earth.

Following the “crypto winter” of 2022 – which saw the prices of well-known cryptocurrencies (such as Bitcoin and Ethereum) more than halve and cryptocurrency exchange FTX collapse amid gross mismanagement and fraud allegations – the sector’s fluctuating fortunes continued through 2023. In March 2023, a Commodity Futures Trading Commission lawsuit charged cryptocurrency exchange Binance with evading US law and breaching derivatives rules. The US Securities and Exchange Commission hit Binance and rival trading platform Coinbase with its own suits in June. Binance subsequently pleaded guilty to federal charges on 21 November 2023, admitting it engaged in money laundering and sanctions violations and would pay USD 4.3 billion in fines.

Expectations for DLT projects and their potential ability to revolutionise the way the industry works have also cooled. Australia Securities Exchange’s decision to abandon its anticipated upgrade of the Clearing House Electronic Subregister System (CHESS) with a DLT replacement intended to accelerate settlement times and reduce costs was emblematic of the shift in ambition.

Yet while sentiment has been tempered, last year saw progress on several important tracks through a more measured and step-by-step approach. The trends for the space have shared a resemblance to the Gartner’s Hype Cycle as of late, with the industry likely now reaching a sort of “slope of enlightenment” after having gone through rather disappointing outcomes (even though it doesn’t mean that the trend will continue to follow the course of the Gartner’s Hype Cycle – let’s wait and see).

The Gartner Hype Cycle:

One positive to come out of the various bankruptcies, platform woes and initiative collapses is the heightened awareness of the risks involved and need for more regulatory engagement. Many jurisdictions (including, but not limited to, Hong Kong, Japan, Singapore, the United Arab Emirates and the United Kingdom) have published new regulatory and supervisory texts on digital assets related topics, and...

??? Written by Natacha Dezert , Blockchain & Digital Assets Programme Manager, Securities Services at BNP Paribas

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