Blockchains to become more scalable
“Common criticisms and reasons argued by the naysayers for not using blockchain technology has been that blockchain-powered platforms would not be able to handle large volumes of transactions. Digital Bytes reported on the 22nd of December 2021that Mastercard processed $6.3 trillion of transactions versus Ethereum which processed $6.2 trillion of transactions in 2021, and predicts that we will see blockchain-powered platforms become faster and be able to handle even more transactions per second as 2022 progresses, so encouraging even greater institutional engagement with this technology.”
· Institutions are investing or using blockchain as part of their day-to-day activities. Ethereum has moved from Proof of Stake to Proof of Works, making this blockchain greener, cheaper, and more scalable. DBS Bank, JPMorgan and SBI DigitalAsset Holdings carried out foreign exchange and government bond transactions tokenised Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen, and Singapore Dollars. The opportunities to use blockchain
technology and digital assets in the $129 trillion debt market have been massive.
Adoption of CBDCs and stablecoins increases
“Given the growing awareness and concerns around climate change, we are likely to see governments and corporations looking to influence and encourage a change of behaviour so as to encourage us all to be more mindful of global warming. Some governments are likely to use a ‘carrot and stick’ approach e.g., a ‘stick’ in the form of taxes to reduce our carbon footprint (congestion charges on roads, taxes on pollution, airline ticket taxation etc) and a ‘carrot’ in the form of carbon credits - possibly even issuing tokens to reward consumption/behaviour which helps the environment (using bicycles, not cars). Corporations may turn to offering tokens as way to reward staff and customers for being more mindful about pollution and recycling as they increasingly focus on being able to improve their Environmental Social Governance (ESG) credentials.”
DeFi set to expand
“Decentralised Finance (DeFi) promises to make financial markets more inclusive on a global basis by offering a range of digital lending, borrowing, insurance, and trading products and services. We are likely to witness other regulated DeFi exchanges follow the lead of Berlin-based Swarm Markets and so enable greater institutional engagement. It will be interesting to see what support the Depository Trust Clearing Corporation (DTCC) in the USA and the International Swaps and Derivatives Association (ISDA) offer DeFi and blockchain-powered platforms in 2022.”
· JPMorgan announced plans to tokenize traditional finance assets and bring trillions of dollars into DeFi. JPMorgan Chase’s ProjectGuardian - institutionally-compatible DeFivia liquidity pools offering tokenised deposits and bonds. FIS,a quoted FinTech firm, has partnered with Fireblocks to offer its clients full access to DeFi and staking. “Goldman Sachs is collaborating with MSCI and Coin Metrics to launch a digital assets framework. Called autonomy, the tool will allow users to keep a tab on the market and will have a focus on DeFi”
Digitalisation of equities, bonds and commodities advances
“There are now a number of regulated exchanges; in the UK - Archax; Switzerland - SIX; Singapore - DBS and Germany - Swarm. If these regulated exchanges are also ‘recognised’, then this will enable many mutual funds to invest in those assets quoted/listed on these regulated exchanges. This may well usher-in the issuing of many more tokenised/digitised wrappers around stock, bonds, commodities, real estate, derivatives and cash in 2022.”
· The first digital fixed-income bond on the German Electronic Securities Act (eWpG). The issue was carried out by
Clearstream on Deutsche Börse’s D7 digital post-trade platform with Deutsche Bank as the lead manager. Fintech futures highlight a plethora of projects in 2022, from a variety of jurisdictions where traditional assets are being digitised,
although we have not seen as much progress as we had predicted in terms of the digitisation and use of smart contracts in the derivatives industry.Daniel Ivanier, CEO at Fragmos Chain when announcing a venture with Finestra, has stated that: “By digitalising the confirmation process of all derivatives, automating all post-trade processes and arduous documentation, such as for the International Swaps and Derivatives Association (ISDA), and eliminating paper, we are helping banks to streamline their operations, trade efficiently and securely, and reduce their risks, capital and costs”. If it can be demonstrably proved blockchain technology and digital assets are able to improve compliance standards at a lower cost, then we will see regulators championing their use…
ESG set to become center stage
“Governments and companies are likely to use blockchain technology to be able to offer greater transparency whereby allowing suppliers and individuals to be able to track and trace where and how goods have been sourced. Meeting Environmental Social Governance (ESG) requirements will continue to be a key issue for prospective investors and firms looking to raise capital. Expect to see ongoing issuance of $/£/€/Yen/CHF billions of green bonds. Existing shareholders, suppliers and staff will also be holding companies to account as to corporations’ ESG credentials.”
Greater adoption of digital assets by governments, corporations and individuals
“As more CBDCs are launched,governments will begin to appreciate how digital assets offer another tool to meet the challenges of the shadow economy, which accounts for 10%-70% of the GDP in various countries and controls their economies. Firms will issue equity, debt and loyalty in a digitised format so increasing the number of digital wallets in circulation, and this will be helped as it gets easier for individuals to engage with digital assets as the whole user-interface with this asset class becomes simpler.”
· Accenture surveyed 16,000 customers in 13 jurisdictions to create its 2022 GlobalConsumer Payments report, in which one in five respondents claimed that they own cryptocurrencies. According JuniperResearch, digital loyalty programme memberships are set to grow by 33% from $24bn globally in 2022 to $32bn+ by 2026. Apple is introducing millions of its customers to cryptographic security (similar to what cryptocurrency users currently use) as Apple rolls out its new Advanced Data Protection. Could this be an inflection point for the use of this technology?
Institutions investing in blockchain and digital assets
“There will be a growing number offirms that buy digital assets and hold them, either in treasury or simply for investment purposes. We have already seen asset managers and banks allocating capital to digital assets and to those firms involved with blockchain technology. In 2022 this trend will continue (possibly encouraged by governments and regulators), given the transparency that digital assets enable for investors, compliance staff, boards and those involved with oversight and monitoring.”
· Alphaweek reported: “Q3 of 2022 saw a monumental level of institutional investment into crypto assets”. There has not been the level of institutional engagement in digital assets as we thought in 2022 although, as we pointed out in a recent article in Digital Bytes (“Asset management firms increasingly turning to blockchain solutions”), institutions have still been active.
Metaverse’s influence set to expand
“The world's first exchange trade fund (ETF) to focus on the metaverse has just been announced, offering investors exposure to what will be a fast-growing sector in 2022 as the likes of Facebook and Microsoft (to name just two IT giants) jostle to dominate the digital lands and games in the metaverse. Look for more multi-national corporations and well-known brands committing an increasing amount of their marketing and tech budgets to having a presence in the metaverse. As remote working becomes more of the norm and people begin to spend greater time and money on the metaverse, we will see increasing competition from companies looking to promote themselves digitally, on-line and virtually as the metaverse ‘morphs’ from being a social/play time activity to being a way for staff to train and collaborate.”
· The common perception is that the metaverse is more about gaming and not much more. So it surprises some to hear Accenture onboarded 150,000 new staff in the metaverse and it has over 600 patents and 245 metaverse projects in and around the metaverse. In 2022, the metaverse was predicted by management consultancy firm, McKinsey, to grow to be worth $ 5tillion by 2030 -bigger than the third largest economy in the world, Japan.
NFTs to evolve in different industries
“We have already seen auction houses, museums, artists, musicians, the film industry, on-line games, sports teams and superstars begin to engage with Non-Fungible Tokens (NFTs). As we see greater regulatory clarity and more robust infrastructure in the form of exchanges, custody and storage solutions being created, NFTs will prove to be irresistible for those who own or are able to create Intellectual Property (IP). Sports stars and their teams, record labels, artists, fashion houses (the list goes on) will all seek how to digitise their IP by using NFTs.”
· Although NFTs started 2022 with bang, the last few months have seen less headlines which in many ways could
prove to be their making as interest in NFTs transitions from speculation to utility. According to the Dappradar.com NFT trading amounted to $ 12 billion in Q1 2022,in Q2 volumes fell to $ 8 billion and then declined further to only $ 2.5 billion in Q3. McDonald's and Coca-Cola, as well as Gucci and Ray-Ban, all issued NFTs in 2022.
Regulation and legislation required
“More jurisdictions will offerlegal and regulatory clarity as to the use of digital assets and the enforceability of smart contracts, thus removing another obstacle for the adoption of digital assets in various formats. As governments see more ‘digitally-savvy’ countries attracting highly paid jobs and companies, 2022 could see legislation being passed in order to encourage those firms engaged with digital assets, FinTech, Reg Tech, Prop Tech, Law Tech, Agri Tech and whole host of ‘xxxTech’ sectors.”
Rising inflation will force interest rates up
“The longer-term impact of COVID-19 will continue to hang over the global economy. The huge debt piles created by governments (meaning there is even more money ‘sloshing’ around), coupled with the desire to restore home manufacturing in a quest to be less reliant on complex international supply chains, will all lead to prices rising. We have already seen various countries increase the cost of borrowing and this is a trend that is set to continue.”
· It is unfortunate that this correct prediction of increasing inflation has come back to haunt equity and bond markets and forced interest rates higher worldwide. Interest rates in the UK are 3.5% (the highest in 14 years are expected to riseto 4.6% by the summer of 2023.
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