Adoption of Digital Finance Technologies Is Impeded by Significant Obstacles

Digital finance technologies, including distributed ledger technology (DLT), possess the capacity to revolutionize the financial sector through cost reduction and enhanced operational efficiency, as reported by CoinDesk. For DLT-based platforms and technologies to achieve widespread adoption, however, a number of significant obstacles must be surmounted. Lack of interoperability and standardization among DLT systems, unreliable digital currency options, regulatory uncertainty, and technology risks are a few of these obstacles.

In recent months, a growing number of institutions have initiated pilot studies and actual transactions utilizing permissionless blockchain technology. Ethereum attracts a significant number of these entities owing to its vast ecosystem comprising various applications and networks. Platforms for digital bond issuance have flocked to Ethereum due to its adaptable architecture and ambitious multi-year upgrade schedule, which has attracted major institutions like the European Investment Bank.

In the past year, asset tokenization, the process of utilizing DLT to convert assets such as real estate, funds, or artwork into digital tokens, has gained traction. In the past year, the aggregate worth of tokenized tangible assets on public blockchains has grown from $1 billion to $2 billion, with Ethereum serving as the primary host for the majority of these assets. Nevertheless, the paucity of dependable digital cash alternatives has hindered the progress of tokenization, causing market participants to conduct transactions off-chain or employ stablecoins.

In lieu of the existing vulnerabilities of stablecoins, tokenized bank deposits and central bank digital currencies (CBDCs) stand as two potential alternatives in the realm of digital currency. While their interaction with public blockchains is still unknown, Moody's anticipates that the development of these digital currency options will continue in 2024. Additionally, legal clarity is anticipated to increase in 2024 due to the development of frameworks by regulators to support new digital assets and services. New licensing regimes and customer and investor protections for digital assets may attract new investors to regions such as the EU, Singapore, and the UAE, while the United States may continue to use regulatory enforcement actions to establish legal precedent in the digital asset marketplace.