New Market Infrastructure is Leading to New Products

New markets and products, whilst there is still uncertainty about their ultimate form, have the potential to be truly disruptive to the existing marketplace and its participants.

NEW MARKET INFRASTRUCTURE IS LEADING TO NEW PRODUCTS

These changes will create new markets and products. The market infrastructure around asset servicing has already changed substantially over the last decade, and will continue to be transformational going forward.

The increased use of DLT and blockchain in particular is spurring the growth of digital assets, and the development of DeFI.

The value of digital assets locked into DeFI services grew from less than US$1bn in 2019 to over US$15bn at the end of 2020, and US$80bn in May 2021.^v There is a great deal of further growth expected.

Digital assets have the power to be truly disruptive. Assets secured on DLT include cryptocurrencies, stable coins, central bank digital currencies (CBDCs), security and asset backed tokens and non-fungible tokens (NFTs).^vi

91% of bank, broker−dealer and asset management respondents to a recent survey felt that digital assets will become dominant over time.^vii

63% of participants were in the process of developing a strategy to invest in or support these assets, while 28% said they already had a clear strategy in place. Only 2% felt that digital assets would not play a role in the future.^viii

It is no surprise then, that digital assets are increasing their market share. The value of the cryptocurrency market topped US$2tn for the first time in April 2021, with Bitcoin accounting for over 50% of the entire market.^ix

According to a 2020 Deloitte survey, 50% of asset manager respondents expect to introduce cryptocurrencies to their funds over the next three years.^x

Like gold, cryptocurrencies have no intrinsic value, although their perceived value comes from the strength of people’s belief in them.

The question, moving to 2030, is whether there will be a big enough ecosystem for one or multiple digital currencies, and how securities services will support these currencies.

Stablecoins, which are cryptoassets that are pegged to other assets, such as the US dollar, have also seen substantial growth, with over 200 stablecoins released or in development globally.^xi

NFTs meanwhile, are experiencing a surge in popularity, though they are still a small part of the market. Between November 2017 and February 2021, a total of US$174m was spent on NFTs.^xii

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DIGITAL ASSETS

The digitisation of the securities environment is well underway and the next step – Digital Assets – are rapidly coming to the fore. In this video, we take a look at the broad categories of this diverse new asset class and the potential benefits to the end investor and the entire value chain.

High profile transactions, such as the announcement by the musicians Kings of Leon that they would be the first band to release an album as an NFT,^xiiiwill only increase the popularity of these digital assets.

Arguably, the greatest developments will come from CBDCs. CBDCs are being explored or trialled by governments across the world and have received backing from The Bank of International Settlements (BIS).

The BIS has argued that they are needed to modernise finance and ensure that ‘Big Tech’ does not take control of money.^xiv

The first CBDC was launched by the Bahamas in October 2020,^xv while 60% of the 60 central banks surveyed around the world by the BIS were conducting experiments and proofs of work in CBDC, with 14% having already moved ahead to pilot projects.^xvi

TRANSFORMING THE INVESTMENT LIFECYCLE

Digital assets will profoundly transform the financial ecosystem. Industry participants, institutional investors and asset managers will soon experience those changes and need to consider the opportunities and risks that the new digital paradigm presents to their existing approaches. It is no longer a question of when digital assets will bring change, but a question of how.