Asia Futurists Leadership Festival 2023: What role do digital asset markets play?

The Role of Digital Asset Markets in the World of Investments

Introduction

In recent years, digital asset markets have gained significant attention as the future of finance. The year 2022 has been an interesting and somewhat bumpy ride for these markets. In this article, we will explore the journey of digital asset markets, the challenges they face, and the potential they hold for investors. We will also discuss the rise of security tokens and the role of institutions in digital finance. Let’s dive in!

Background

Before we delve into the topic, let me provide a brief background about myself. My name is Kelvin, and I am the President and Chief Business Officer of Fusang. I have been involved in the digital asset industry for several years, working on projects such as Bycar, Liquidnet, and serving as a regulator for the SFC. I am also the co-chair for the AFO for Philanthropy and Legacy Group. Feel free to connect with me on LinkedIn for further discussions.

The Tale of Two Types of Digital Assets

When it comes to digital assets, there are two main categories: crypto assets and the digitization of finance. Crypto assets, represented on the left side, have always raised questions about their true valuation. The valuation models for many crypto tokens have been questionable, leading to uncertainties in the market. Additionally, the lack of legal structures and governance in the crypto space has posed risks for investors. The recent market turmoil, such as the Terra Luna crash and the FTX Saga, has highlighted the need for stronger legal frameworks and regulations in the digital asset markets.

On the right side, we have the digitization of finance, which aims to bring traditional financial assets onto the blockchain. However, the adoption of blockchain technology in traditional finance has been slow. Most securities are still traded on traditional stock exchanges, making it difficult to transfer them onto the blockchain. There is also a lack of standards for asset tokenization, with different projects using their own methodologies and approaches. Despite these challenges, the vision of digitizing finance remains exciting for the industry.

The Journey of Digital Assets

To understand the journey of digital assets, let’s take a look at some key milestones. In January 2009, Bitcoin was born, marking the beginning of the crypto revolution. It took a few years for the market to gain traction, but the launch of the Ethereum platform in 2013-2014 brought significant attention to the space. The introduction of ERC20 tokens on Ethereum and the ICO craze in 2017 further fueled the interest in cryptocurrencies. However, the market also experienced crashes and volatility, driven by factors such as shorting and the influx of liquidity from government stimulus.

Lessons Learned

Throughout this journey, we have learned several lessons. Firstly, there is a huge interest in value transfer through blockchain protocols. Fundraising has been a significant aspect of cryptocurrencies, but the ICO craze has subsided, and fundraising has shifted to more regulated platforms. The promise of blockchain technology in finance is yet to be fully realized, with limited adoption by institutions. The lack of regulation has hindered institutional adoption, but as regulatory frameworks evolve, we can expect more institutions to enter the space.

The Stifling of Institutional Adoption

The lack of regulation and governance in the crypto space has stifled institutional adoption. Many centralized intermediaries, calling themselves exchanges, resemble broker platforms rather than spot exchanges. Poor risk management practices, conflicts of interest, and fraudulent operators have also plagued the market. However, as regulatory frameworks mature, these issues will be addressed, and the market structure will become more stable.

The Rise of Security Tokens

In recent years, security tokens have gained traction as a way to tokenize traditional assets. In 2016, the first security token offerings (STOs) were launched on Ethereum, and since then, we have seen various projects tokenizing assets such as real estate, private equity, and bonds. The valuation models for security tokens are more transparent and easier to explain compared to cryptocurrencies. Institutions have shown interest in security tokens, with investments in private and public equities. The tokenization of securities has the potential to revolutionize the market and create new opportunities for investors.

The Time is Now for Asset Tokenization

The current regulatory landscape and institutional interest indicate that the time is ripe for asset tokenization. Staking products, which generate yield, are likely to be classified as securities, leading to more robust regulation. The lack of bankruptcy protection for client assets will also be addressed, ensuring better safeguards for investors. Institutional adoption of digital assets, including cryptocurrencies and security tokens, is on the rise, with major players like BlackRock entering the space. The future of finance lies in the tokenization of assets, and investors should consider participating in this market boom.

Frequently Asked Questions (FAQs)

Q: What are the challenges facing digital asset markets?
A: Digital asset markets face challenges such as questionable valuations, lack of legal structures, governance issues, and regulatory uncertainties.

Q: How are security tokens different from cryptocurrencies?
A: Security tokens represent ownership in traditional assets, such as real estate or bonds, and are subject to regulatory frameworks. Cryptocurrencies, on the other hand, are decentralized digital currencies that operate on blockchain technology.

Q: What is the role of institutions in digital finance?
A: Institutions are gradually entering the digital finance space, investing in cryptocurrencies, security tokens, and exploring strategic investments in the digital ecosystem. Their participation is crucial for the growth and stability of the market.

Q: How can I participate in the tokenization of assets?
A: If you are interested in tokenizing your assets or accessing the digital asset market, you can explore platforms like Token Bridge, which offer tools and infrastructure for asset tokenization. It is also advisable to seek guidance from professionals in the field.

Conclusion

The role of digital asset markets in the world of investments is evolving rapidly. While challenges and uncertainties exist, the potential for asset tokenization and the entry of institutions into the space offer exciting opportunities for investors. As regulatory frameworks mature and market structures become more stable, the future of finance will be shaped by the tokenization of assets. It is an exciting time to explore the digital asset market and participate in this transformative journey.