Digital finance technologies hold a lot of transformative potential. Distributed ledger technology (DLT) – of which blockchain is the best known example – powers digital bond issuances that, in time, could lessen the need for intermediaries in the issuance process, thereby improving operational efficiency and potentially reducing costs. DLT also underlies tokenization of real world assets, which could increase accessibility of certain instruments.
However, to make these potential benefits a reality and gain wider adoption, in Moody’s view, DLT-based technologies and platforms will need to overcome several key hurdles, including a lack of interoperability and standardization among DLT systems, a lack of reliable digital cash options, regulatory uncertainty and technology risks.
This post is part of CoinDesk's "Crypto 2024" predictions package.
In the last few months, an increasing number of institutions have begun to engage with permissionless blockchain via both pilot studies and real transactions. Many of these entities gravitate towards Ethereum, given its extensive ecosystem of applications and networks that have developed their own user base and product offering in the last few years. As an open-source public blockchain, Ethereum provides a blockchain base layer on top of which developers can build solutions for sharing data and value across other networks.
Ethereum’s flexible design and its multi-year plan for upgrades, including ones that will improve interoperability, have made it a popular platform for digital bond issuances. Large institutions such as the European Investment Bank have issued bonds on Ethereum, which was also the blockchain underlying a digital green bonds Moody’s rated in 2023, a €10 million senior unsecured digital green bond issued by Société Générale. Over time, in Moody’s view, public blockchain networks like Ethereum and traditional infrastructure will be more interlinked, which will enhance blockchains’ use cases, promoting industry growth.
Asset tokenization – converting an asset such as a fund, real estate or art into a digital token, making it storable and transferable using DLT – has been gaining ground in the past year. Total value of tokenized real world assets on public blockchains increased to $2 billion from $1 billion in the last 12 months, and Ethereum currently hosts the vast majority of it. One factor slowing the adoption of tokenization is a lack of a reliable form of digital cash, which has led market participants to settle transactions off-chain or use stablecoins.
Stablecoins, a cryptocurrency whose price is pegged to a reference asset, such as fiat currency, are a form of digital cash, but under stressed market conditions stablecoins have not always maintained their peg. However, two other forms of digital cash that could address the present vulnerabilities of stablecoins are tokenized bank deposits and central bank digital currencies (CBDCs). The development of tokenized bank deposits and CBDCs will continue to progress in 2024, in Moody’s view, although their degree of interaction with public blockchains is still unclear.
Legal clarity will also likely improve in 2024, in Moody’s view, as regulators progress in developing frameworks to support new digital assets and services, although not all regions are advancing at the same pace. Regions including the EU, Singapore and the UAE could all attract new investors as a result of new customer and investor protections and new licensing regimes for digital assets. The U.S., meanwhile, will likely continue to use regulatory enforcement actions to establish legal precedent within the digital asset marketplace, as development of a digital asset framework in the U.S. remains a more distant goal.