The surge of institutional interest in digital assets and blockchain technology over recent months has come as a big surprise to many. After the epic meltdown that precipitated the FTX bankruptcy in November 2022, the crypto market looked terminally ill. It appeared that trust in all digital assets and the new Web3 technology had been irrevocably damaged.
Today, bitcoin prices are now reaching higher highs, thank to the U.S. Securities and Exchange Commission’s (SECs) January approval of bitcoin ETFs. Blackrock’s bitcoin ETF was the fastest growing ETF in history to hit the $10 billion mark in funds under management, in less than two months, and is now lauded by many.
Larry Fink, Blackrock’s CEO, has become the poster-child for digital assets declaring that, “The next generation for markets, the next generation for securities, will be tokenization of securities and real-world assets,” hot off the heels of a 2022 BCG report claiming that the potential for tokenizing global illiquid assets to be an estimated $16 trillion opportunity by 2030.
Blackrock has just launched a new tokenized fund offering a stable value of $1 per token and paying daily accrued dividends directly to investors wallets in new tokens each month. The funds invests 100 percent of its assets in cash, U.S. Treasury bills, and repurchase agreements. That the product has been launched on the public Ethereum network, is a significant market milestone.
Last month HSBC issued a $750 million (HKD6 billion) digitally native green bond for the Hong Kong government on its Orion platform, the largest-ever digital bond deal with over over 50 global investors and across four different currencies (HKD, CNH, USD, EUR).
This recent digital bond launch follows a number of digital bonds issued by the European Investment Bank (EIB) over the past 18 months with financial institutions like Euroclear, Goldman Sachs, SocGen, Santander, BNP Paribas, and HSBC, to name a few.
Institutions and are now embracing this new generation of technology and the market opportunities that come with it. Moves by financial institutions and their fintech partners to move digital asset projects from PoCs to production onto smart contracts and distributed ledger technology (DLT) started really hitting the headlines last autumn.
While the move to digital asset money markets funds and vanilla products like ETFs demonstrate confidence in digital assets for retail customers, it is sovereign debt issued on DLT that is considered the real “first move” in the capital markets. This is the enabler for the next generation of digital financial market infrastructure (dFMI) for states to help digitally transform aging industrial to service-based economies and get them into the digital space race.
How did the digital assets markets make such a rapid turnaround in under two years?
A Slow-burning Relationship
Considering the time it takes for large corporations to adopt this new technology, it should be recognized that the current interest in blockchain is far from new. Much of the activity that’s happening now has been in development for far longer than the short 15 months that have elapsed since the collapse of FTX.
The bitcoin genesis may have enabled the launch of digital assets to the world, but the key trigger for enterprise interest in blockchain was the launch of Ethereum in 2015. At SIBOS 2015 in Singapore, Swift’s annual conference for financial institutions, the big message was “blockchain is the future of finance”, delivered to standing room only CxOs.
Within a year, reports emerged that JPMorgan had been developing a permissioned implementation of a new platform on Ethereum called Onyx. The surprise popularity of NFTs in 2021 marked another turning point for enterprise adoption when brands like Nike and Starbucks started making strategic inroads into Web3.
During the past decade, public blockchain infrastructure has developed to the point that legacy issues such as scalability and privacy are beginning be better addressed by developers. Near a decade on, the 2015 “blockchain proclamation” is now starting to resonate.
Although there’s still plenty of work to be done, the progress that has been made has no doubt been a key factor in increasing enterprise trust factors, even as the markets have remained volatile.
Bentzi Rabi, Co-founder and CEO of institutional crypto operations platform Utila, agrees, “The poor user experience in blockchain has been arguably far more debilitating to enterprise adoption historically than crypto market volatility. Now that we’re beginning to overcome some of the longstanding issues like scalability and interoperability, the focus is on leveling up the UX and removing friction.
“The ultimate measure of trust and adoption is when blockchain and digital asset integrations of all kinds simply flow seamlessly together with established business processes, delivering measurable improvements.”
From Public to Private with ZK
A pivotal change that’s brought blockchain and business closer together is the advancements made in privacy technology over recent years. The concept of trust in the Web3 sphere has always been centered around the ability to verify facts in a trustless way, which effectively meant publicly on a blockchain.
The emergence of zero-knowledge (ZK) solutions has changed this, enabling “trustless” verification of transactions and data without the need to broadcast them on the blockchain network.
The most developed use case for ZK technology is currently rollups, used by Layer 2 platforms such as Polygon and Immutable X to make Ethereum more scalable. While scalability is undoubtedly valuable to enterprises and institutions, the privacy applications of the technology offer vast scope to make business processes more efficient while reducing compliance and operational overheads.
Mickael Canu, CEO at Ternoa, which is developing a zkEVM platform compatible with Ethereum and Polkadot explains, “Today, companies collect vast amounts of personal and corporate data at a very granular level, which presents huge challenges in terms of storage, processing, compliance, and cybersecurity. ZK technologies provide multiple ways to tackle the issue.
“Privacy-focused L2 platforms combined with trusted execution environments can help to secure the most business-critical data from exposure. Identity solutions mean that personal data, which typically only needs to be verified and not necessarily collected (such as with a KYC control), could be checked using a zero-knowledge proof instead of a company taking custody of documents and information.”
The Bank of England announced last year that it was partnering with identity and payment firm Nuggets to develop an identity and privacy layer for a future digital pound based on ZK technology. The city of Buenos Aires has also developed a digital ID protocol in a similar way. Initiatives such as these effectively embed blockchain and ZK tech as a trust layer within established, familiar processes and entities.
Taming the AI beast
One key external factor is also set to play a part in cementing blockchain’s role as a trusted enterprise technology – the rise of AI. The proliferation of AI tools and content has been so rapid that it’s left questions about the integrity of intellectual property regulations and algorithm transparency simply hanging in the air.
Blockchain technology offers a way for AI firms to close some of the gaps, introducing transparency into their data and algorithms via a public ledger. Last year, enterprise blockchain firm Casper Labs announced it was launching a collaboration with IBM to develop a solution for transparency and “auditability” in AI. It aims to provide visibility into how AI models are using data across industries, including finance, healthcare, and retail.
William Simonin, Chairman at Ta-da, a platform for ethical data collection and AI training that pays users to complete microtasks, believes that blockchain lays down the gauntlet for AI firms.
“The emergence and popularization of AI-based assistants, such as Chat GPT, have opened the eyes of the general public to the power and immense utility of AI. In light of this, it becomes imperative to rethink and optimize our data collection methods. This is essential not only to support the rapid expansion of artificial intelligence in the coming years but also to maximize its potential in service of innovation and progress,” says Simonin.
The relationship works both ways – AI can help to improve trust in cryptocurrency and digital assets, by spotting trends and issues in the market that humans may overlook.
Herbert Sim, Chief Operating Officer at trading platform Websea, says, “Trust and information asymmetry are a huge problem for the average cryptocurrency trader. Given the vast complexity inherent in the markets, it’s beyond human capability to keep track of all the variables and risks at play.
“AI tools are helping to level the playing field, processing vast amounts of data to intelligently detect and assess risks and make recommendations or execute trades automatically based on set parameters.”
It may appear to some as if the current institutional interest in Web3 tech is driven by yet another tech hype cycle, though its pretty tough to beat AI on that front after the last year. It does appears that smart money is building a foundation of trust in digital finance with this better-established technology.
Maybe, and just maybe, smart money is starting to form part of a new decentralized finance social contract with society, and it is proving it is able to survive the political and economic volatility dished out so far in the the 21st century. Sit tight, there is plenty more of this story to come.
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