Blockchain's Impact on Financial Services in 2024
Peter Johnson- Jan 3, 2024
- 5 min read
DeFi will experience growth, yet it will not expand nearly as quickly as centralized finance.
This past year, 2023, has been an eventful one for the blockchain sector. It commenced with the meltdown of FTX, the world’s third largest crypto-exchange, and then had to grapple with record-breaking fines for Binance, the world's biggest exchange, in November. These turns of events gobbled up the industry news throughout the year, along with the hype about ChatGPT. Consequently, some significant bullish characteristics of blockchain tech for finance got lost in the shuffle. Here I have highlighted five trends that will continue well into 2024 and be further established in the upcoming months.
Before getting into the trends, one thing is certain: Centralised finance (or TradFi) will be the major force behind technological progress in the coming year. There is no denying that decentralization is constantly progressing, with decentralised assets being more and more recognised and sophisticated concepts developing viable real-world applications. All the same, for every forward movement taken by decentralised blockchains, centralised ones take two. From digital central bank money to digital currencies issued by commercial banks, or tokenisation of traditional financial assets, the coming year looks to be a thrilling one - especially for fintech aficionados.
Innovation tends to fail when there is not enough market demand or when the costs are exorbitant. But sometimes, even the best of technological advances can be impeded by either too much or too little regulation. Criticisms of the cryptocurrency space have raised many questions that need to be answered. Will the proclamations of some who want to do away with decentralized finance succeed or will moderates who favor laws that allow for a more progressive approach triumph?
The MiCA regulation of the EU demonstrates that crypto and digital assets can be managed properly. I have certainty that US legislators and supervisors will seek to maintain the marketplace as free as feasible, while simultaneously releasing some sound instructions. Their conclusion is going to be noticed across the world.
In 2024, the US will likely have more insight into digital assets following decisions from the SEC on whether to approve proposals such as Blackrock's spot ETF. Along with Blackrock, firms like Grayscale Investments, ARK Invest and 21 Shares are looking for the SEC to accept their applications.
If the U.S. Securities and Exchange Commission (SEC) does approve the Bitcoin Exchange-Traded Fund (ETF), as I anticipate, 2024 will be the year digital assets become widely accepted worldwide. A new wave of liquidity from institutional investors is expected. Many banks and enormous organizations will allocate a portion of their assets under management to cryptocurrencies. Banks the world over will start giving their customers the option to purchase cryptos. A few early adopters in Europe such as Revolut and Commerzbank have already capitalized on the regulatory clarity established by the Markets in Crypto-Assets (MiCA) regulations to provide these services. Therefore, if the ETF is given the go-ahead and Wall Street increases investment in bitcoin (and perhaps some other cryptos such as Ether) this can be followed by greater demand from individual investors as well.
Additionally, in the upcoming years, there will be an on-going trend of centralization, with physical assets like real estate, stocks, and commodities being converted into digital tokens on blockchain platforms. It is projected that tokenized RWAs would become a market sized $10T within the next decade, and major institutions such as the World Bank are already moving their RWAs to blockchain-based systems; an example of this is the tokenized security service for the 100bn EUR digital bond issuance, launched only last October.
Tokenization of RWAs affords investors more fluidity and convenience, and comes with various other benefits. To illustrate, individuals can now have parts of valuable assets, creating chances for partial ownership and facilitating trading.
Tokenization of RWAs is more than just leveraging blockchain technology for centralized finance. It symbolizes the combination of on-chain and off-chain resources and thus the initial crucial link between the classic and decentralized finance system. Pondering who will get the most out of this and how to reap its rewards? Then take a look at my piece on the Super Money Engine.
One particular asset will be particularly important to tokenize - bank deposits - and this may prove to be a major game-changer in terms of (wholesale) settlements.
Tokens issued by a licensed depository institution on a blockchain, known as Deposit tokens, provide a number of advantages when compared to conventional settlement methods and most stablecoins. They offer greater security and stability, being backed by regulatory frameworks and eligible for deposit insurance. This allows the existing financial system to benefit from enhanced capabilities and increased efficiency.
Many major US banks are testing out deposit tokens and it is highly unlikely that they will experience any regulatory issues. This indicates that deposit tokens are poised to quickly become a noteworthy blockchain solution for swiftly and securely transferring money, especially for international purposes.
Central banks and commercial banks are implementing centralised blockchain technology and digital assets. 130 nations, which accounts for 98% of worldwide GDP, are investigating central bank digital currencies (CBDCs). These are blockchain-based forms of fiat money, in which the central banks maintain control of the money supply.
The Chinese digital yuan project, piloted in 2019, experienced a tenfold increase in transaction volume to 250 million USD in June 2023. This serves as a prime example of how swiftly a state-backed cryptocurrency can become established in a major economy.
In November, the ECB entered into a preparatory stage. Despite the fact that the digital Euro is unlikely to become a reality before the end of the decade, there is a clear political desire to introduce a blockchain-based Euro. By 2024, we will see what a digital fiat currency could be like in a free world, since the Fed in America opts to be more conservative, meaning that a digital dollar is not yet in sight.
Should any doubts have still remained that Big Tech sought to secure profits from financial services beyond payments, they were clearly put to rest in 2023. It was indisputable that tech companies wanted to move past being mere payment facilitators, and they had enough influence and power to rival banks in their traditional field of operations. Apple's savings account in the US saw 1 billion USD deposited into it within a mere four-day period following its launch. Simultaneously, Apple Pay had grown to be a key source of revenue for the tech company. Such was the extent to which finance had come to be treated as a highly strategic asset to American tech giants, rather than as a minor addition to make their platforms more attractive.
Tech giants are forecasted to broaden their reach in numerous directions; from itemizing services such as banking and credit, to literally obtaining greater segmentation of the elements of the supply chain. Apple Pay Later is a prime example of their capabilities; utilising their AI acumen, as well as their considerable storehouses of data to judge creditworthiness. There is more to come in the next year. Concurrently, the courts will be presenting determinations regarding whether or not Apple and other giant entities are abusing their dominating roles as gatekeepers of the digital economic system. Interestingly, though, these tech giants are simultaneously using open banking regulations to introduce financial services, while barring competitors from participating.
The coming year will likely be one to keep a close eye on Apple as it narrows the contenders to replace Goldman Sachs as its banking partner in the US. The banking industry in particular will want to know if such relationships with tech giants can be mutually beneficial. However, fintech experts should be particularly cautious with regards to how tech giants handle digital assets and their progress on their blockchain ventures, regardless of the scale. The move to amalgamate digital assets with traditional financial assets will be necessary as the world of finance shifts to a multi-asset structure, and I anticipate that large tech organizations will be among the first to take this action.
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