Digital assets have continued to make headway across the globe despite concerns over market volatility, with a growing number of institutional investors flush with liquidity looking at the new asset class as a source of yield. The market capitalization of cryptocurrencies has grown to just under US$3 trillion from around only US$578 billion in November 2020, according to data from CoinMarketCap.
Similar to international peers, institutional investors based in Asia are likewise looking at the prospects of digital assets and how the asset class can be better understood. Around 92% of investors in the region find digital assets appealing, compared to 78% for US-based investors, according to information from Fidelity Digital Assets, indicating the openness some investors in gaining exposure to high-yielding assets.
From hedge funds to private banks, institutions must be able to articulate their position on digital assets. The same goes for financial regulators across the globe, whether it be the El Salvador approach of using Bitcoin as legal tender or China’s approach of outlawing the trading of digital assets with the exception of its central bank digital currency (CBDC).
In the end, there generally will be three scenarios on how various digital assets will develop in the coming years.
The first scenario involves a sharp readjustment of the valuation of crypto assets as both investors and financial regulators question their real worth, especially those outside well-known names such as Bitcoin, XRP and Ethereum. One only needs to see last year’s Squid Game’s coin Ponzi scheme to see the risks facing investors looking to gain exposure. At one point the crypto asset per coin was valued at US$2,856 before crashing 99%. This could be coupled with increased regulatory scrutiny of the market fundamentals of some crypto assets, resulting in investor sentiment shifting to other digital assets such as tokenized securities and CBDCs.
Another situation sees efforts to tokenize traditional assets stalling. While there have been already several pilot cases of assets such as bonds being tokenized in the market, this scenario assumes that the cost of change may not be worth it for some institutions. Under this situation, pilot programmes fail to gain traction and the mindset around tokenization of assets fails to result in adoption beyond a few occasional cases.
Finally, the third scenario assumes a general balance between financial regulation and adoption, where stakeholders in the entire ecosystem from digital asset custodians to institutional investors and financial regulators work together to formalize a framework around digital asset usage. Financial regulators also adopt a wait-and-watch approach as to where developments will lead.
While it is challenging to accurately predict how digital assets will evolve in the future, there is some certainty around the greater use of CBDCs, with several countries already working on their own respective projects. Jamaica, for example, plans to launch its CDBC in the first quarter of 2022. China, which currently has the most advanced CBDC initiative, has reportedly rolled out a CBDC wallet for its eCNY. According to data from the People’s Bank of China, the ongoing eCNY pilot project has already executed 70 million payments as of June 2021.