DLT and digital assets
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Where are we in the journey?
1. DLT and digital assets have never been more important.
In the fifth year of our DLT in the Real World survey, DLT and digital assets have never been more strategically important.
Across all market participants, this year saw the sharpest rise yet in the strategic importance of DLT and digital assets. The 9% YOY jump follows a small downturn in 2023, reflecting a post-FTX mindset and a greater focus today on the commercial application of DLT and digital assets, as we move past the era of experimentation.
Not surprisingly, the Exchanges and CSDs who were early adopters continue to lead the way in recognising the digital opportunity. Given their role at the heart of the institutional ecosystem, financial market infrastructures (FMIs) look increasingly well positioned to deliver the benefits of DLT and digital assets to banks, brokers and regulated firms, in a way that is safe, standardised and resilient. With banks, brokers and investors increasingly looking to revert to their core specialisms (of managing product issuance and risk – but not market infrastructure), the opportunity and pull for FMIs to act as “bridges” between traditional and digital liquidity pools seems to be increasingly compelling. Digital efficiencies, yes. Decentralisation, no.
Our data also evidences strongly higher interest from private banks and wealth managers in 2024. After experiencing the rapid growth of crypto and related opportunities for fractional investing, they now see the potential for rapid improvements in historically manual, fragmented and opaque markets such as private and physical assets. As the wealth space shifts from crypto to tokenisation, DLT is clearly an opportunity to leapfrog older technologies and create more liquid, accessible markets to meet unprecedented investor interest.
2. Fewer DLT projects, but more live initiatives than ever.
Since 2022 there have been two, parallel narratives playing out in the world of DLT and digital assets. On the one hand, new announcements continue to highlight the significant growth in digital asset issuance and adoption across the capital markets. Other the other hand, many perceive the DLT and digital opportunity to have passed its peak following the “crypto winter”.
In 2024, it appears that both are true.
We’ve never had more live usage of DLT than we do now. With 37% of respondents now “live” with DLT and digital assets across the capital markets, we have reached a stable (and critical) mass of organisations that are now busily commercialising the digital opportunity.
Equally, we have never had fewer firms working on DLT and digital assets. Since the “hype-peak” in 2021, levels of DLT experimentation and proof-of-concepts (POCs) have continued to decline every year, to the point where only 10% of firms are working on POCs today and only 8% are in build-phase.
The industry is no longer going wider in its DLT and digital asset activity. Whilst many of the explorers of 2021 and 2022 have successfully launched their solutions in 2023 or 2024, few new firms or digital initiatives appear to be launching entirely new propositions. Instead, the industry’s next phase appears to be one of deepening: those who are live are looking to expand their propositions; and those who are not live will remain largely on the sidelines for now.
It’s time to shift how we measure market growth and focus on depth rather than breadth. As the market matures, the type, scale and impact of initiatives in the market are a better indicator of progress than simply counting the number of projects in flight.
3. USD16 billion of issuance: But no transactions.
If 2024 is characterised by the shift from ‘wider to deeper’, it is also defined as the year when industry focus moved from issuance to (transactional) liquidity.
To date, we’ve seen more than USD 15 billion in natively digital assets issued, largely in the last five years. Since 2018, we have successfully demonstrated that we can issue all forms of digital debt and structured products, to the point where new issues of digital securities attract relatively little attention. Thanks in large part to the active leadership of the world’s central banks and supra-nationals (who have together issued 54% of all digital bonds), we know what is possible, we know the benefits of DLT in the issuance phase and we know what is expected of us as market participants in supporting these issuances.
But if issuance is now moving into business-as-usual mode, transactional activity is still only just beginning. With more than two-thirds of initiatives generating less than USD 10 million in annual turnover, most of the digital assets issued to date are going into digital wallets and sitting there. Immobile and illiquid, these assets carry an enormous opportunity cost in performance (versus their traditional peers), meaning that our ongoing digital asset issuance is creating a growing blockage in the pipe. With every digital, sovereign bond that is issued, this problem is becoming more acute.
If we are to successfully create an environment where digital assets perform to the same level as their traditional equivalents across the entire security lifecycle, industry attention now needs to prioritise questions of liquidity, including ecosystem builds, network interoperability and digital cash.
Dig into the details in our podcast series!
DLT in the Real World (Series 3) with the HKMA:
What does it mean to issue over HKD6 billion in digital bonds?
In this latest episode of our DLT in the Real World Series (run in partnership with ISSA), James Fok explains how the Hong Kong Monetary Authority’s CMU has delivered efficiencies of over 1,000 hours per bond issuance, through its Evergreen and Genesys initiatives.
4. Digital ecosystems really are multilateral now.
A leading indicator for transactional liquidity is the size of the ecosystem in which the digital assets exist – and thankfully there is cause for optimism here.
No market can be liquid if it has no participants, but fortunately 2024 has seen a return to growth in the average size of digital ecosystems such that the average DLT platform now includes more than four participants. In strong contrast to 2023, when the average ecosystem was almost entirely bilateral, the majority of DLT initiatives now have more than 7 participants.
We appear to have moved into a phase of truly multilateral digital activity – concentrated largely in the payments / digital cash and fixed income areas above all. And with this multilateral activity, true asset mobility can really begin.
5. We're still two years away from greatness
Since 2021 we’ve tracked the anticipated impact of DLT within organisations. Over time and every year, we have said the same thing: meaningful industry transformation is two years away.
This belief is as strong in 2024 as it was in 2021 – highlighting a continuing gap in our expectations around the likely speed of progress. Despite evidence showing clearly that industry transformation is a slow and evolutionary process, we appear to still believe that we can generate transformational, multi-lateral benefits from DLT and digital assets within less than 24 months.
On the one hand, the ambition and urgency that supports this view is welcome and is a driver for change in itself. With numerous initiatives still in Series A and B funding stages, the clock is ticking loudly for some to evidence viable, commercial and digital propositions at scale. Within banks, business plans made in 2021 that forecast rapid growth by 2024 are doubtless coming under increasing scrutiny, pushing business leaders to accelerate their development as much as possible. As we explore below, there are clear signs that this urgency is driving a practical focus on the key enablers to commercial viability and compelling firms to be tactical in their treatment of connectivity and funding options, for example.
That’s not to say we haven’t seen significant change. Whilst earlier initiatives focused on driving internal efficiencies, over the last two years the emphasis has shifted to multilateral efficiencies in recognition that capital markets transactions involve multiple providers and counterparties. The ‘industry restructuring’ category has undergone a significant reality check and now follows the multilateral initiatives – appropriate, as no one organisation or initiative can drive systemic change. As talk of “digital disruption” and “decentralisation of finance” begins to ebb, focus is clearly shifting towards increasing efficiency between counterparties, one step at a time.
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