In 2023, the momentum behind the tokenization of real-world assets experienced a notable acceleration. Moody's representative, Cristiano Ventricelli, anticipates this momentum to continue, especially with Ethereum poised for advantageous growth.
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The transformative potential of digital finance technologies remains undeniable. One standout technology is Distributed Ledger Technology (DLT), with blockchain being its most recognizable manifestation. DLT facilitates digital bond issuances, offering the promise of reducing intermediaries in the issuance process. This reduction could lead to enhanced operational efficiency and potential cost savings. Furthermore, DLT forms the backbone for real-world asset tokenization, potentially democratizing access to various financial instruments.
Yet, for these promising outcomes to materialize and achieve broader acceptance, Moody's highlights several challenges. These challenges encompass issues such as interoperability and standardization gaps among DLT systems, the absence of dependable digital cash alternatives, regulatory ambiguities, and inherent technological risks.
Recent developments show a growing institutional interest in exploring permissionless blockchain through pilot initiatives and tangible transactions. Notably, Ethereum emerges as a favored platform for many. Its expansive ecosystem has cultivated a diverse range of applications and networks over recent years. Serving as an open-source public blockchain, Ethereum offers a foundational layer upon which developers craft solutions for seamless data and value exchange across diverse networks.
Ethereum's adaptability, coupled with its strategic upgrade roadmap focusing on interoperability enhancements, positions it as a preferred platform for digital bond issuances. High-profile entities like the European Investment Bank have already utilized Ethereum for bond issuances. Additionally, Ethereum served as the foundational blockchain for a notable digital green bond, valued at €10 million, issued by Société Générale in 2023. Moody's anticipates a future where public blockchain networks like Ethereum and conventional infrastructures intertwine, amplifying blockchain's potential applications and fostering industry expansion.
The practice of asset tokenization—digitally transforming assets such as real estate or artwork into tokens—has observed significant growth over the past year. The total value of tokenized real-world assets on public blockchains surged from $1 billion to $2 billion within a year, with Ethereum hosting a predominant share. Despite this growth, challenges persist, including the absence of a dependable digital cash system, prompting market participants to resort to off-chain settlements or stablecoins.
While stablecoins, pegged to reference assets like fiat currency, serve as a form of digital cash, they've displayed vulnerabilities during market strains. Yet, potential solutions like tokenized bank deposits and Central Bank Digital Currencies (CBDCs) are emerging. Moody's foresees continued advancements in these areas in 2024, though their integration with public blockchains remains uncertain.
Looking ahead to 2024, Moody's predicts enhanced legal clarity as regulatory bodies refine frameworks for emerging digital assets and services. While regions like the EU, Singapore, and the UAE may allure new investors through enhanced protections and licensing structures, the U.S. is expected to leverage regulatory enforcement actions to shape the digital asset landscape, given its evolving regulatory framework.
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