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Decentralisation shapes the future monetary system and business infrastructure

Blockchain is an emerging technology that has the potential to reshape monetary economics and the overarching business infrastructure in the years to come. Distributed ledger technology (DLT), the parent technology behind blockchain, facilitates a number of use cases such as identity management, value storage, and settlement operations. Blockchain itself records and represents ownership which makes the technology a powerful innovation for transactional and contractual applications. There are three systemic use cases for blockchain that makes it transformational as an enabler of an open and decentralised commercial and operational methodology.

Role in the monetary system

Blockchain has mainly been known for its payment function and financial speculation in which Bitcoin takes a central role. With reference to the gold standard and the original idea of its founder(s), many perceive Bitcoin as digital gold to protect against the debasement of fiat currencies. Ether, on the other hand, is valued for its overarching role as the underlying protocol in infrastructure and commercial applications. They are further discussed in the dedicated sections below. There are many other types of other cryptocurrencies such as XRP, Cardano and NEO.

At the core of the speculative waves in cryptocurrencies stands the question of their inherent value. Most economist and fundamental investors struggle with applying the traditional value concept to cryptocurrencies, and remain dismissive about the topic. Without the backing of a real asset (such as gold) and/or an explicit or implicit government guarantee as well as the absence of a typical cash-flow profile, cryptocurrencies do not follow the conventional rule of asset pricing. This anticyclical role of Bitcoin further remains in doubt. With the exception of shorter time periods, Bitcoin seems to follow risky assets, heavily driven by quantitative easing and monetary policy over the last few years.

In a historical comparison, the price evolution of Bitcoin may follow the characteristics of an asset bubble. At the beginning of a bubble, there is usually a new idea or innovation with a limited availability and supply. As a consequence of the innovation impact, there is a lack of transparency, which makes it difficult to correctly evaluate the technology according to conventional standards. There is a high level of asymmetry in information and knowledge, resulting in a veritable supply monopoly. There is a small group of insiders who originally developed and held the assets through which they controlled the supply. As the price increases accelerates and the technology with its use cases gets more broadly accepted. Investors remain anxious to miss out. The distinguishment between productive and speculative bubbles provides further context to this analysis. A productive bubble has unused capacities and may lead to a positive economic effect. A speculative bubble, on the other hand, is a dynamic efficiency response to the limited investment opportunities of productive real capital. Many productive bubbles with extreme price volatility stood at the initial phase of the deployment of a new technology. This may apply to cryptocurrencies which underlines its long-term value but may also lead to a volatile cycle of wealth creation and destruction until the technology applications find their steady state.

Creating value through technology infrastructure

Blockchain creates value through new technology infrastructure. The transactional and contractual applications in the legal and financial industry are the most obvious use cases. Under the Decentralised Finance (DeFi) movement, blockchain is in the process of reshaping the financial industry in a series of a broader infrastructure applications such as stablecoins, synthetic trading, clearing and settlement coins. Blockchain technologies have become the digital delivery mechanism of different underlying assets and will replace today’s derivatives and insurance contracts. These developments started a new period of digital financial innovation.

Stablecoins are crypto‐based assets that are linked to and redeemable in fiat money (different available currencies such as the USD), commodities (precious metals such as gold), and any other underlying assets (such as crypto itself). The coins are usually issued by an independent third party (known as the operator) and through the decentralised mechanism of the blockchain network with the objective to mitigate potential forms of counterparty risk. They can be traded on exchanges and are redeemable from the issuer at the conversion rate to take possession of real assets. The value of fiat‐backed stablecoins is based on the value of the backing currency, which is usually held by a third‐party regulated financial entity. USD stablecoin, which runs on different blockchain such as the Ethereum, is pegged to the US dollar. The name stablecoin is misleading as it comes from the stabilisation effect of assets outside of crypto space and/or the combination of different assets to a lower volatility crypto assets. As stablecoins are backed by underlying assets though, they are subject to the same volatility and risk associated with the underlying pool of assets. The cost of maintaining the stability is the cost of storing and protecting the backing with an adequate level of reserves or a similar mechanism. Operators of stablecoins typically say they are backed one-for-one with reserves of the asset (e.g. USD). The largest of such a stablecoin is Tether that mirrors the USD (USDT). Its operator claims that Tether is pegged to USD, and this is maintained through dollar-based reserves that always enough to match its tokens in circulation. TerraUSD (UST), by contrast, was a USD stablecoin, backed by a smart-contract algorithm linked to its sister-token, Luna. It is known as algorithmically stabilised coin with a mechanism to permanently destroy Luna tokens in order to mint new UST ones. Through this mechanism, UST keeps its dollar peg in check. Terra’s model was experimental and failed spectacularly when its value fell to almost zero in early May 2022, and is now under criminal investigation. Tether had previously be fined by two regulators for making false statements about its reserves. Both examples are good illustrations of the ongoing challenges for regulations and the wider issue of financial stability. At the same time, stablecoins are getting considered by central banks as a tool of monetary policy. The Treasury Secretary convened a committee of top US officials to discuss the growth of stablecoins and the associated risks, followed by recommendations on the applicable regulatory framework.

Smart contracts are computer protocols intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract without third‐party involvement. Several blockchains have implemented types of smart contracts with Ethereum as the most prominent representative. In a smart contract, many kinds of contractual clauses are partially or fully self‐executing, self‐enforcing, or both, which makes it very attractive in the use of financial instruments with specific cash flow and settlement specifications. Different smart-contract use cases facilitate the synthetic trading of assets, historically represented by derivatives contracts either traded at regulated exchanges or over the counter. They replace traditional derivatives structures with their legal and collateral requirements. Synthetix, for instance, is a protocol for minting and trading synthetic assets on Ethereum. Synths are synthetic assets on the Synthetix protocol that are designed to track the value of an asset. Uniswap, as another example, is establishing a decentralized liquidity pool through an automated market maker model. The model relies on tokens that are always paired with Ethereum, ensuring there is always enough liquidity between any two tokens. Participants can add to or withdraw their funds at any time in exchange for trading fees in proportion to their share of the pool's liquidity. Synthetic trading is still in an early stage but has huge potential for modernising trading infrastructure through more adaptable delivery mechanisms and liquidity provision.

The settlement of securities transaction is further facilitated on the blockchain. The objective of utility settlement coin (USC) is to remove settlement and counterparty risk to increase speed and reduce financial, operational, and frictional costs. A consortium of international financial institutions have backed under the venture Fnality International the creation of a network of distributed financial market infrastructures using blockchain to deliver the means of payment-on-chain for wholesale banking markets. Other consortiums such as R3 and ventures such as Ripple developed a real‐time gross settlement systems that are based on blockchain. Digital Asset Holdings started to work early with ASX, the Australian stock exchange, to develop a blockchain-based post-trade platform.

The tokenisation of global data utilities

Tokenisation represents a broader trend to sell digital goods on blockchains. It is a wide concept that encompasses the representation of various assets, both fungible and non-fungible, as digital tokens. Tokenisation can involve representing physical assets (such as real estate or artwork) or intangible assets (such as intellectual property) as digital tokens on a blockchain. A token itself is a unit recorded on a blockchain; often referred as a coin. Native tokens are not backed by an issuer or asset and tracked on the cryptocurrencies' respective blockchains such as Bitcoin and Ether. They represent fungible assets that are interchangeable with other assets of the same type and value. Each unit is equivalent and can be exchanged on a one-to-one basis. Asset-backed tokens are tracked within smart contracts on any blockchain, and can be used to represent ownership of any asset. Accordingly, they are called non-fungible token (NFT). Non-fungible assets are unique and cannot be exchanged on a like-for-like basis. Each NFT has distinct properties, characteristics, and ownership rights that set it apart from other tokens. They have found applications in gaming, virtual worlds, digital fashion, and other areas where unique digital items or experiences can be tokenised. NFTs have gained significant popularity in recent years, particularly in areas of art and collectibles, where they enable verifiable ownership, provenance, and scarcity of digital assets.

A blockchain is also a globally shared distribution database where no none owns the data. Through tokens, the ownership of the data can be defined which stands at the core of the Web 3 movement. Web3, the abbreviation of the term Web3.0, refers to a digital movement that aims to create a decentralized and user-centric online environment with the next generation of internet applications. It emphasises principles such as user privacy, data ownership, and user empowerment by leveraging blockchain technology and peer-to-peer networks. Its objective is to enable direct interactions between users without intermediaries. DeFi stands at the core of the Web3 which itself is still in an early stage. Legal and regulatory standards need to be defined and globally implemented. The commercial and operational potential with its development is comparable to the internet in the early 1990s.


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