Digital assets might represent the future of the banking and financial services sector as we know it. They offer multiple positives over existing financial systems, and evidence of a tighter integration between the two is beginning to be seen. There have been multiple reports of adoption regarding the state of digital assets and governments all around the world. Here are 4 ways digital assets are redefining the state of the global financial and economical systems.
Central Bank Digital Currencies (CBDC)
Simply put, CBDC is similar to the fiat issued by governments today. However, the difference is that a CBDC is a digital instrument, which is approved for use as a means of payment, a unit of account and a store of value by the government. It is also considered a legal tender, which means it can be used to buy and sell anything that fiat money can.
CBDCs are being considered by the governments of UK and Sweden, with the latter engaging in active research to create a currency known as the e-Krona. This is an example of a CBDC, as it will be issued by Sweden’s central bank, the Sveriges Riksbank, with a view to provide citizens with alternatives to dwindling cash usage.
CBDCs can potentially provide a highly technologically efficient way to control the flow of money in a country, as it can be easily engineered to settle instantly using systems such as the blockchain. This will not only remove the need for existing systems such as clearinghouses, but also enable a smoother payments experience for anyone who uses it. Such a system will boost confidence in privately controlled money systems, along with increasing trust in the system, an important prerequisite for fiat currencies and fractional reserve banking.
Optimized International Settlements
Along with the potential to change how the government issues money to the population, digital assets can also change the way that Governments interchange value with each other. Today, cross-border payments take anywhere between 3 days to a week, with settlement occurring after a considerable period of time. This is mainly due to the system that is used today for settlements, known as the Society for Worldwide Interbank Financial Telecommunication. Otherwise known as SWIFT, this has been in place for the better part of the century, and involves exchanging messages between banks regarding the sending and receiving accounts.
SWIFT is outdated, error-ridden and slow, and is not a fit for the digital world. Even as they aim to update their software, with the release of the SWIFT Global Payments Interface, a company known as Ripple is taking over the cross-border space for payments. This company utilises a digital asset known as XRP to provide liquidity for cross border transactions. This will free up funds that banks are required to maintain known as nostro accounts, releasing value worth trillions of dollars into the market. Moreover, settlement takes place within a few minutes, with tests showing that the process is painless, transparent and quick.
Tokenizing Real-World Assets
The widespread adoption of digital assets might result in the tokenizing of real-world assets, so as to better fit into a system where everything functions on digital assets. By utilizing the blockchain, one can tokenize what is effectively real, such as a house, gold, or even stocks. Anything that can imply the transfer of ownership through a contract is fair game, as blockchains are able to utillise something known as smart contracts for the secure storage and management of tokenized assets. Shares have already begun becoming tokenized, as it allows for a higher degree of movement and exchange. These are now called security tokens, and represent a new wave of not only tokenizing value in the form of stocks, but also as a fundraising mechanism for companies wishing to go public.
Real estate is also a market that is prime to be tokenized, as lease and ownership contracts change hands frequently. Tokenization will also allow for the fractional ownership of a single unit of real estate, thus increasing liquidity and efficiency while targeting pain points for those dealing in alternative assets.
The rise of digital assets have not only changed the way that the general population perceives BFSI, but also the sector as a whole has changed its perspective on the adoption of blockchain technologies. Emerging technologies have demonstrated the capability to both adapt to and disrupt incumbent systems. Now, the question remains, how quickly will the sector adapt these technologies?
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