As finance has firmly entered the digital era, the concept of value has started to transcend formerly physical boundaries, manifesting in forms no one could have foreseen even just a decade ago.

Today, the term digital assets doesn’t simply refer to highly speculative cryptocurrencies or NFTs—the ecosystem has expanded dramatically to encapsulate a much wider range of purposes and services. As 2023 unfolds, the digital asset landscape is more diverse, complex, and promising than ever. As the digital asset domain evolves, it’s this wider range of facets that may prove the key to the future of finance.

Today’s Landscape: Beyond Speculation

Volatility within cryptocurrency markets has shaken confidence – and cost investors a lot of money – over the last 18 months. Bitcoin soldiers on, but its value has been cut in half from its all-time high in late 2021. The plummet of NFTs was even more dramatic – as of last year seeing a nearly 90% drop from its all-time highs, according to data from Chainalysis.

While the future of these spaces remains uncertain – and they’ll remain technologies to watch for new innovations – more stable solutions are increasingly taking shape. 

CBDCs

Eleven countries, including the Caribbean and Nigeria, have already launched theirs, and with more on the way, a future in Central Bank Digital Currency is less speculative by the day—according to research from the U.S.-based Atlantic Council think tank, a total of 130 countries representing 98% of the global economy are now exploring the concept, representing every member of the G20 except Argentina.

In the United States, progress on a digital dollar seems to be more centered on the wholesale side – an underpinning for the economy to power interbank transfers in a fundamentally different way. These wholesale CBDCs could form a foundation upon which further innovations are built; revolutionizing the speed and liquidity of bank-to-bank settlement.

Presently, no central bank has introduced a wCBDC, but they are inching closer. According to a BIS Innovation Hub report to G20 Finance Ministers and Central Bank Governors, In February 2023 the Hong Kong Monetary Authority assisted the Hong Kong SAR government in issuing a tokenised green bond based in part on the learnings from Project Genesis. The full lifecycle of the bond on is issued on a Distributed Ledger Technology (DLT) platform, including issuance, settlement of secondary trading, coupon payment and redemption. The payment leg was also tokenized; these “single-purpose” cash tokens are akin to a wCBDC.

Designing a retail CBDC is a more difficult undertaking to realize, however – the sheer multitude of stakeholders involved, and varying needs between them, means that the days of cash are nowhere near over yet. So far, only four jurisdictions have introduced retail CBDCs – the Bahamas, the Caribbean, Nigeria, and Jamaica. Adoption rates have been mixed across these pilots, but as lessons are learned, they can be carried forward collaboratively between other nations as they develop their own. A digital dollar isn’t here yet, but it seems increasingly inevitable.

Tokenized Deposits

Tokenized deposits as conceived are digital versions of bank deposits, created by regulated institutions and stored on distributed ledgers. Designed to facilitate trades of tokenized real-world assets and other digital assets, their form can be either account or token-based.  

That said, they remain largely theoretical at this juncture.

Though financial institutions and central banks are starting to explore this avenue, several regulatory and business concerns remain unresolved. Capital and liquidity requirements could be transformed by different behaviors and usage driven by tokenized deposits, and the regulatory landscape in which any of this might exist – particularly regarding the interchangeability of deposits from institutions – remains painfully murky.

Ultimately, tokenized deposits could bolster banks by strengthening their funding sources and offering a medium to engage in the digital asset domain, potentially paving the way for the evolution of traditional finance.

Stablecoins

As a bridge between traditional and digital currencies, fiat-backed stablecoins continue to grow – in 2022, transactions involving them passed $7 trillion. That promise has paved the way towards exploration for real-world payment applications. Possibilities abound for helping create cheaper paths to international remittances, merchant payments with quicker settlement times, and other roads to powering real-time payments across a variety of transactions from retail to commercial spaces.  

Decentralized stablecoins, however, have taken a credibility hit – following the 2022 Terra/Luna collapse, algorithm-based peg maintenance revealed itself to be as fundamentally volatile as the rest of the crypto market, leading to new designs that are based entirely on overcollateralization, particularly within DeFi lending platforms. This capital inefficiency will likely continue to limit growth in this sector over the near term; a more effective innovation will be needed to bring back the promise present in DeFi’s initial launch.

The Regulatory Landscape

Long-focused on anti-money laundering and anti-criminal activities, U.S. regulations in the digital asset space has finally started to mature past that point, to look at broader viability for development. In 2022, Biden signed an executive order committing to responsible research and development in the sector, and more recently, a long-awaited discussion draft from the House of Representatives provided real insight into what the statutory framework for digital asset regulation might look like in the U.S.  

Their proposal outlines a future in which the SEC and CFTC offer joint rulemakings on transaction requirements, disclosure requirements, and provides a legal framework for the broad treatment of digital commodities and assets in general – as well as critically needed antifraud measures for payment stablecoins.

The digital asset landscape continues to innovate at a rapid pace in 2023. As fiat-backed stablecoins gain traction in real-world payment applications, their role in bridging the traditional and digital financial worlds becomes ever clearer.

This shift towards fiat-backed answers to ward off volatility in the crypto market suggests a future in which traditional finance is not simply displaced by Bitcoin or Ether, but simply adapts, shaping the trajectory of digital assets. As regulators, institutions, and innovators grapple with these issues, one thing remains certain: the integration of blockchain technology into our financial systems is not just inevitable, it’s already underway. The task now is to harness its potential while navigating the complexities it introduces.