5 blockchain-driven trends that will shape financial services in 2024
DeFi will grow, but not nearly as fast as centralized finance
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2023 has been yet another tumultuous year for the blockchain industry. The crypto-universe rolled into January shaken from the devastating collapse of FTX, the world’s third largest crypto-exchange. For crypto-prices and -businesses it was a steep climb back, but it was one that continued despite historic fines for the world’s largest exchange Binance this November. These ups and downs have dominated the blockchain news-cycle. Together with the buzz around ChatGPT they have eclipsed some crucial developments that have started to unleash the potential of blockchain technology for the finance industry. I want to shed light onto five trends that will not only persist into 2024, but will fully develop over the next months.
Before we get into the trends, there is one common thread underpinning them: Centralized finance (or TradFi) will be the real driver of technological progress next year. There is no doubt that decentralization is continuously moving forward. Decentralized assets are becoming ever more accepted while more advanced concepts are maturing and finding valuable real-life use cases. But: For every step decentralized blockchains take forward, centralized ones take two. Whether it is digital central bank money, digital currencies issued by commercial banks, or the tokenization of traditional financial assets – we are looking at an extremely exciting year ahead. At least for fintech wonks.
Trend 1: Upcoming SEC-decisions are about to chart the trajectory for DeFi-assets
Usually innovation fails because the market demand is not there. Or it has some serious drawback like excessive costs. Sometimes, however, new technology is chocked off by regulation – either too much or too little of it. There certainly hasn’t been a shortage of fodder for crypto-critics to vilify the entire technology. But the question after FTX, Binance, and the series of other scams is what conclusions you draw about what happened. Will the populist voices succeed that want to abolish decentralized finance or want to forbid banks to be part of it? Or will more level-headed and forward-thinking lawmakers and regulators prevail?
Crypto and digital assets can be efficiently regulated as the EU’s MiCA regulation shows (Markets in Crypto Assets). In the end, I am confident that US lawmakers and regulators will keep the market as open as possible, while at the same time issuing clear guidance. Whatever they decide, it will be felt across the globe.
2024 will first and foremost be shaped by increased clarity about digital assets in the US. The SEC is supposed to decide very soon whether to greenlight Blackrock’s spot ETF. And it is not just BlackRock, but other heavyweights like Grayscale Investments, ARK Invest, and 21 Shares that are also queuing up for SEC approvals.
If the SEC does approve the Bitcoin ETF, as I expect it will, 2024 will be the year digital assets really go mainstream worldwide. There will be a wave of new liquidity from institutional investors. Many banks and large institutions will allocate a portion of their assets under management to cryptocurrencies. And banks around the world will start providing their customers with the option to purchase cryptocurrencies. Some first movers in Europe like Revolut or Commerzbank are already leveraging the regulatory clarity brought by the MiCA regulation to provide those services. Thus, a greenlighting of the ETF and a surge of Wall Street investments into bitcoin (and perhaps some other crypto-assets such as Ether) could be followed by an increased demand from retail investors too.
Trend 2: Tokenization of real-world-assets (RWAs) will jack up on-chain liquidity
Moreover, the next years will be defined by another centralized trend, which is the tokenization of real-world assets such as real estate, stocks, and commodities. This involves converting physical assets into digital tokens on blockchain platforms. Tokenized RWAs could grow to a $10T market by 2030. Prominent institutions like the World Bank have started putting RWAs on blockchain rails. Just this October a tokenized security issuance service for the World Bank‘s 100bn EUR digital bond issuance went live.
Tokenization of RWAs allows for greater liquidity and accessibility and encompasses a number of other advantages. For example, investors can hold fractions of high-value assets, opening up opportunities for fractional ownership and easier trading.
Tokenization of RWAs is more than just deploying blockchain technology for centralized finance. It represents the melting of on-chain and off-chain assets and thus the first major intersection of the traditional and decentralized financial system. Wondering whom this benefits most and how to use this convergence in your favor? Then read my article on the Super Money Engine.
Trend 3: Banks will tokenize deposits to boost settlement efficiency
The tokenization of one particular asset will be more important than any other, namely bank deposits. They might easily end up a game-changer for (wholesale) settlements.
Deposit tokens are transferable tokens issued on a blockchain by a licensed depository institution in which the token is evidence of a deposit claim against the issuer. Deposit tokens have numerous advantages over traditional ways of settlement, as well as over most stablecoins. They are backed by clear regulatory frameworks and eligible for deposit insurance. Thus, they equip the current financial system, which is working reliably, with new capabilities and new efficiencies.
Major American banks are currently piloting deposit tokens and it is hard to imagine any significant regulatory hurdles coming up. These are strong indicators that deposit tokens will very soon become a major blockchain tool for efficiently moving around money, in particular for cross-border use cases.
Trend 4: CBDCs are coming to stay
Central banks and commercial banks are starting to scale centralized blockchains and digital assets. 130 countries, representing 98 percent of global GDP, are exploring central bank digital currencies (CBDC). Those are blockchain-based versions of fiat currencies, in which the central banks stay in control of the money supply.
The Chinese digital yuan project, which piloted in 2019, boasted 250 million USD in transaction volume in June 2023, a ten times increase compared to the previous year. This is the best of how rapidly a CBDC can gain a foothold in a major economy.
This November the ECB entered the preparation phase. Though the digital Euro will most likely not go live before the end of the decade, the strong political will to introduce the blockchain-based Euro is palpable. In the course of 2024 we will get to know what digital fiat money could look like in the free world, because in America the Fed prefers to err on the side of caution so that a digital dollar is not yet on the horizon.
Trend 5: Big Tech will further spread its tentacles through the world of finance
If there was anybody still in doubt that Big Tech aimed at grabbing for financial services outside of payments, they were proven wrong in 2023. Tech giants unmistakably demonstrated that they want to be more than just the payments interface and that they have the gravitas to challenge banks in their core business. When Apple launched its savings account in the US, it drew 1 billion USD in deposits within just four days. At the same time Apple Pay has already emerged as a main revenue driver for the tech giant. Finance is no longer a fringe product that makes the platform more appealing but it has become a strategic top-priority for American tech giants.
Tech giants will continue to expand horizontally by offering more services such as savings and lending. But they will also grow vertically by grabbing ever more levels of the supply chain. With Apple Pay Later the tech giant already started to do the risk scoring in-house by using its AI expertise and its vast troves of data. Expect more of that in the next year. Also, courts will be ruling on whether Apple and others are abusing their position as powerful gatekeepers of the digital economy. Paradoxically, tech giants are leveraging open banking mandates to offer financial services, but then block competitors out.
In the coming year all eyes will be on Apple as it chooses the replacement for Goldman Sachs, its banking partner in the US. The banking world in particular will weigh on the question of whether partnerships with tech giants can be profitable for both sides. But what fintech experts should be more vigilant about is how tech titans treat digital assets, as well as further steps on their blockchain journey, regardless of how small. As the world of finance continues to march into a multi-asset paradigm, it will be all the more crucial to integrate digital assets with traditional financial assets. I expect large tech corporations to be among the first ones to do so.