What Comes Next In Financial Services?

Digital assets, beginning with cryptocurrency and evolving rapidly to include tokenized forms of money and financial instruments, have been with us for well over a decade now. In the beginning they existed on the fringes of established financial systems, but as the world slowly became more accustomed to them, and as they evolved to include central bank digital currencies (CBDCs) and stablecoins, this changed. Stability and utility allowed for a genuine appreciation of the benefits that the underlying technology enables: efficiency, accessibility, transparency, security, and always on availability.

So much progress has been made that we are no longer the often-cited “three to five years” away from digital assets becoming mainstream. Stablecoins and tokenized deposits demonstrated real value for payments-related use cases. I believe the industry is nearing the tipping point and expect tokenized financial instruments to proliferate across financial markets, providing the same array of benefits for securities, private equity, private debt and alternative assets.

Moving forward, we will see a significant increase in banks and capital markets firms offering a range of digital assets products and services – especially in custody, payments, trading and wealth management.

The US as a catalyst

Financial services has shown increasing interest in digital assets for years. Many firms limited their exploration to launching blockchain projects; few have gone into production, and those that have are mostly managing relatively low volumes. The exceptions are a cluster of fintechs and a few leading financial institutions.

The catalyst that may help push digital assets into the mainstream – at least in the US – is the aggressive stance by the new administration. While it has banned the development of a U.S. CBDC – despite other governments moving forward with their own CBDC efforts – it has otherwise adopted a pro-innovation stance. Measures include the repeal of SAB-121, which effectively barred banks from providing custodial services for digital assets, and the establishment of a working group on digital asset markets to review regulations and propose a federal framework for stablecoin issuance and market structure.

The message for banks and capital markets firms appears to be: “Don’t ask or wait for permission – just do it!”

The US is not alone. The Institute of International Finance (IIF) is working on its ambitious Project Agorá to capitalize on digital assets to reinvent payments. The initiative spans seven countries, including the US, and several central banks and dozens of commercial banks are participating.

No longer a fad

Looked at together, these developments are a pivotal point similar to that which confronted all businesses in the ‘nineties: “Is the Internet real or just a passing fad? Will we profit from going online and becoming an Internet business?”

Like the Internet back then, digital assets today exist mostly in liquidity islands that are isolated from each other by a variety of barriers: technical, regulatory, reputational and a lack of critical mass, among others. These are rapidly weakening as governments either soften their resistance or, as in the US, ramp up their support for digital assets; also as trusted names in the industry throw their weight behind the new assets, and as enabling frameworks and infrastructure are established.

In the near future, I believe, the floodgates will open and digital assets will be bought, sold and transferred seamlessly.

It’s a historic time for financial services firms. The rewiring of the global financial system will allow for a wide range of digital-asset offerings, creating a host of opportunities. Tokenized deposits and, potentially, interest-bearing stablecoins are just two examples.

But there is much work to be done to realize this potential. Firms need to figure out how digital assets can work for their counterparties. This starts with getting commercial banks into the ecosystem, identifying the key components for integration, developing a seamless business process workflow, refitting existing operational teams and platforms, establishing a risk and compliance framework, and more.

While different jurisdictions across the world will take different paths, there’s a great need for private-public collaboration and global interconnectivity, as there is only so much that banks and capital markets firms can do on their own. Regulators have a vital role to play, the global interconnectivity needed for cross-border flows requires high-level international cooperation, and private firms will need to operate in harmonious competition with central banks’ digital currencies.

Changing the game

All of this is already underway. Blockchain and other distributed ledger technologies have been recognized as game-changers that could consign the current message-based transaction reconciliation model to the dustbin of history and replace it with a transformative shared model. Traditional business process flows simply cannot provide the liquidity that digital assets will.

There’s still a lot of skepticism about the potential of digital assets to transform our financial landscape, but bear this in mind: Stablecoin transfers in 2024 outpaced Visa and Mastercard’s combined transaction volume by 7.68%.

No one today describes their business as an Internet business. For the same reason, it won’t be long before the term “digital assets” becomes a quaint anachronism. They will simply be assets. This is the hockey-stick moment when all indicators suddenly tip upwards toward the vertical.

The question is, who will be ready to take advantage?