Whereas the digital assets discussion revolves mostly around the price of cryptocurrencies, digital coins, and market dynamics, I believe there is one aspect that needs to get more attention the infrastructure behind it all.
A digital asset can exist without a blockchain or another kind of distributed-ledger technology, but its operation depends on such a ledger to document transactions and ownership of digital assets. There are various wallets, exchanges, custodians, validators, payments, and other systems that enable the use of digital assets.
Stablecoins provide a great illustration of that point. According to the IMF, "stablecoins are typically stored and transferred using public blockchains, while the broader stablecoin ecosystem encompasses wallets, exchanges, custodians, issuers and blockchain validators.
That is why I believe the infrastructure narrative is more exciting than mere observing token prices.
According to the Bank for International Settlements, "the experimentation with distributed ledgers, tokenization, payments and settlement conducted by financial institutions is shifting into production projects.
Bank for International Settlements
That is where, in my opinion, the real story begins.
Another development is the concept of tokenization. Tokenization basically refers to the process of digitizing assets or claims on a common, programmable ledger.
It can refer to financial assets, deposits, securities, or other tangible assets. According to the IMF, tokenization can affect the existing infrastructure for issuing, transferring, and registering assets, which may lead to reducing certain reconciliation lags and operational costs.
However, I do not consider tokenization to be a technology that will solve all issues automatically.
There are many difficulties to overcome. For instance, there may be interoperability issues among various blockchains. Other concerns may also appear with regard to property rights, transfer validity, and finality of settlements. Interoperability, operational constraints, and legal uncertainty are listed by the IMF as potential difficulties to tackle.
This is quite significant, as the development of infrastructure does not only require developing a blockchain protocol.
Other aspects include regulatory frameworks, cybersecurity, governance, custody, compliance, as well as integration of new systems into the existing financial infrastructure.
What intrigues me is how this infrastructure is gradually connecting to the existing financial system rather than replacing it.
The BIS suggests that the process of tokenization can become a part of the modern financial infrastructure, and their latest research has included applications in the sphere of payments, securities and other financial transactions.
Projects on interoperability of digital assets, tokenized deposits and central bank money have been researched. For instance, there has been an attempt to explore use cases in such spheres as fixed income, investment funds, liquidity management and trade finance through the BIS's Project Ensemble.
However, I would like to stress that it is very important not to misinterpret this information as a prediction that the blockchain will replace banks and the entire financial system. Based on available evidence, the process is rather about adaptation and integration.
Bank for International Settlements
This is what makes the topic so intriguing to me.
Maybe the most significant feature of the digital assets will not be the actual assets people can see on the screen but the financial infrastructure that is being built underneath.
