This is a guest opinion post from Alvin Chia, Northern Trust SVP, Head of Digital Assets Innovation (APAC) and Dr Sizheng Fan, Senior Research Scientist at Harvest Global Digital Asset.
Bitcoin’s stunning rally in 2024, driven in part by a wave of bitcoin exchange-traded funds (ETFs) launched in the U.S. following regulatory approval in January, has convinced even the skeptics that the cryptocurrency is here to stay. While cryptocurrency is just one of the many digital assets, its implications for the broader asset class remain uncertain.
Not long ago, proponents of digital assets saw a revolution, with bitcoin being the most popular example of technology that has the potential to permanently change how we use and store money.
We hear less talk of radical change in the current rally, as bitcoin is seen primarily as a speculative trading asset, made accessible to retail investors through regulated fund structures. Previous bitcoin bull runs, followed by the bursting of a speculative Non-fungible Token (NFT) bubble in 2022, the collapse of FTX and the tightening of government regulations across the globe last year, had cooled public interest before the current rally, while more exciting – and easier to use –inventions like ChatGPT captured popular attention.
With all eyes now back on the price of #BTC, we would argue that more interesting long-term change is happening away from the spotlight. Many blockchain projects have been diligently humming away in the background of market turbulence to improve the speed, experience and security of their blockchain. As developers iron out the issues that made the tech fail to take off in big ways, 2024 might spell the real dawn of digital assets.
Bitcoin coffee, Stablecoin pizzas
Usability – the sheer inconvenience – of digital assets has been the crux of the matter. For all its early promise, making cross-border transactions or even a basic payment with crypto or digital tokens is still a hassle that not many can stand.
Not to mention the difficulty of efficient safekeeping options for the assets: the menu ranges from cumbersome public-private key pairs to complex wallet addresses that can intimidate novice users, leading to human error, theft or accidental losses. Furthermore, the nascent infrastructure supporting digital assets often lacks the polish and user-friendliness of traditional financial systems, presenting additional barriers to entry for the general public.
Beyond user experience, there are potentially serious privacy issues and even the risk of double spending on blockchain.
Perhaps no wonder that cities are not awash in Bitcoin cafes and Stablecoin pizza joints. Many of the early attempts at such enterprise have since closed – as the vast majority of society still cannot see how digital assets fit into their daily life.
As the Monetary Authority of Singapore declared in its Project Guardian white paper: “Existing digitalization efforts fall short of the expectations of efficiency improvement, greater financial access, and improved revenue opportunity which proponents of digital assets and DLT tout.”
Until these key issues are addressed through user-friendly interfaces, robust security solutions, and streamlined infrastructure, digital assets may remain largely confined to the realm of tech enthusiasts and early adopters.
Lessons from Web 2.0
Developers are now moving to address the convenience barrier to Web 3.0 by borrowing design principles from the Web 2.0 playbook that emphasise a frictionless experience. This means rethinking the way we hold digital assets under custody, authenticate users and recover lost assets. At its core, people need to have a seamless user experience, while not compromising security.
Furthermore, it’s important that the underlying operations of the tech infrastructure are aligned to national and international laws so transactions can be recognised and achieve finality within 2-15 seconds.
We could also explore the adoption of new token standards, such as ERC1400 to capture the complex regulatory requirements that asset tokenisation brings. While dominant standards such as ERC20 for fungible tokens and ERC721 for non-fungible tokens have been broadly used, liquidity, legal and compliance challenges have yet to be resolved.
Digital asset players in it for the long haul have spent the past few years working to build up the back-end systems and company partnerships needed for all this to be seamless and simple on the user side. We count ourselves in this category.
The continued development of such far reaching use cases of digital assets promises to make them familiar to market participants. Only then can users see the value instead of getting lost in the frustrations of complicated systems.
Is 2024 the year of digital assets – again?
Signs are pointing to a new wave of digital asset interest. Investors across both retail and institutional markets are looking at Bitcoin again for long-term, less speculative buys with the introduction of the Bitcoin ETFs. While the Bitcoin ETF does not equate to direct holdings, the format allows for better investor protection, increased liquidity and lower tracking error which are all favoured by the larger institutional investors.
At the same time, tokenisation activity is also picking up pace in Hong Kong, with the government issuing a second round of tokenized green bonds in February 2024. Building on the success of the first US$100m issuance in 2023, the second issuance will continue to drive the message of efficiency and transparency to educate the public of the benefits of blockchain technology.
Together, these factors point to a potential resurgence in digital assets, this time with much more secure and seamless products.
Naturally, this should be balanced against the need to add guardrails to protect retail investors from making unresearched investments too easily.
These are all good signs. More seamlessness is what we need to realise the core aim of digital assets: to revolutionise the way we deal with money and to benefit people. To benefit people, we need to start with what makes sense to the user. This is what is needed to make the leap from big promises to actual payoffs.
This is an institutional rather than consumer focused publication. However, Northern Trust required the following text. This is not a sponsored post.
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