This past year was a challenging year for global markets, with crypto markets falling by more than 50% from their peak in 2021. Macroeconomic events, including the tightening of interest rates by central banks around the world to combat rising inflation, as well as a reduced appetite for speculative investments, have caused investors to pull out from the digital asset market in droves and prices to plunge.
Despite these significant headwinds and the volatility in the broader digital asset industry — compounded by the dramatic implosions of overleveraged players such as FTX — it’s important to remember that the industry still made important progress in 2022. This year saw Hong Kong launching its first crypto ETFs, the Australian Treasury driving forward its “token mapping” exercise that will define digital asset regulation and the development of appropriate custody settings to safeguard consumers, and the Indian central bank launching its e-rupee pilot. All of these developments — while not a cure-all panacea — can only serve to benefit the industry in the longer term.
Looking to the year ahead, what trends can we expect to see taking off in the digital assets space in the Asia-Pacific region, and who will be the key players behind these trends?
NFTs will see the physical and digital worlds converge
Non-fungible tokens, or NFTs, have seen exponential growth since entering the mainstream consciousness in 2021 when an NFT by the artist Beeple sold for US$69 million, making it the most expensive NFT ever sold at an auction. In 2021, trading in NFTs saw a staggering 21,000% increase to US$17 billion, with NFTs permeating pop culture (remember when Snoop Dogg was revealed to be NFT art collector Cozomo de’ Medici?) and collectibles and gaming NFTs racking up the largest sales volumes. While we are unlikely to see that kind of transaction trajectory continue, what we are likely to witness is a tectonic shift from NFTs merely ascribing digital ownership to providing a whole host of features, including special discounts, memberships and more.
This next wave of financial innovation will see retailers honing in on NFTs to extend the customer journey beyond the checkout basket, with the aim of building a loyal community and creating brand longevity. One such way brands could do so is by minting a limited number of NFTs to create exclusivity, whether that be offering exclusive merchandise or providing priority access to events, thereby creating greater engagement as a result.
An example of a company exploring the potential of NFTs is TravelX, which is tokenizing airline tickets that can be exchanged or resold. Apart from providing travelers with the flexibility to sell their unused flight tickets, airlines also stand to improve operational efficiencies post-booking and reduce distribution costs. Imagine a world in which Cathay Pacific sells airline tickets that passengers can not only auction, sell, transfer, give away as a gift, or exchange, but which they may also use to access special experiences at their destination, thanks to a collaboration between Cathay and the Singapore Tourism Board, for instance.
We are also seeing retail platforms such as Flipkart use NFTs as a means of continuing to build engagement with consumers past the point of purchase, such as airdropping limited-edition NFTs. NFTs stand to open up a whole new world for both brands and consumers, creating far greater engagement as a result.
Tokenization will transform financial markets
The concept of tokenization — or managing traditional assets through wallet and blockchain infrastructure — stands to promote both growth and inclusion in the financial markets. In 2022, we saw major banks and asset managers around the world launching or preparing to launch tokenized assets such as bonds, carbon credits and private equity funds. So why is tokenization piquing the interest of financial institutions?
It boils down to the numerous benefits that tokenization brings, including greater efficiency, thanks to automation and disintermediation, more transparency, increased liquidity, and faster clearing and settlement times, as demonstrated by Singapore’s Project Guardian. This live test this past November saw the completion of transactions involving the buying and selling of tokenized Singapore government securities, Singapore dollars, Japanese government bonds and Japanese yen by DBS Bank, JPMorgan and SBI Digital Asset Holdings. Done on a larger scale, tokenization stands to completely transform the way in which financial markets operate.
While we are still in the nascent stages of tokenization and there is still much more progress to be made, financial institutions acknowledge that tokenization’s potential is enormous and this is likely an area where we will see huge strides being made next year.
The rise of CBDCs and stablecoins
This year will also see the spotlight shining on blockchain-based payments, especially in the areas of merchant settlement and cross-border transactions. Today, cross-border payments are slow, inefficient and costly, with the transfer of money between countries dependent on “an archaic network of corresponding banks.” According to the World Bank, these remittances cost a whopping 6% of the total transfer value, with digital channels accounting for less than 1% of total transaction volume. Remittances to East Asia, the Pacific and South Asia grew between 0.7% and 3.5% but there are still significant disparities between the individual countries in this vast region.
To address these issues, central banks around the world are already beginning to adopt digital assets, and more than 20 countries this year are expected to take significant steps toward the development and piloting of their own central bank digital currencies (CBDCs).
Last year, Singapore conducted its first trial, as part of Project Orchid, with purpose-bound money that “specifies the conditions upon which an underlying digital currency can be used” in the form of commercial digital vouchers, government vouchers and payouts.
Meanwhile, ANZ executed the first-ever Australian-bank-issued Australian dollar stablecoin (A$DC) payment, removing investors’ reliance on unbacked private coins. Both CBDCs and commercial bank-minted coins will have their own roles to play in the financial system, with financial institutions being able to use the latter for specific use cases via smart contracts.
Businesses also stand to benefit from blockchain-based payments, whether internally within the company or externally when paying vendors. These transparent and trackable payments reduce cross-border settlement times by up to 99.8% and fees by 93%, making it one of the most obvious and tangible use cases that will see traction in the new year.
While CBDCs and stablecoins are still in their infancy, they hold great promise and their successful implementation will depend on investment, regulation and adoption, though this will likely take a few years to unfold.
Get the FUD out
Fear, uncertainty and doubt (FUD) are normal given the events that transpired with the FTX collapse and the prolonged Crypto Winter. However, like every winter, the clouds will pass, the chill will thaw, the industry’s resilience will shine through and new projects will emerge in the industry’s spring.
While investors may not be as buoyant as before, financial institutions continue to be interested in the fundamentals of the technology, which is encapsulated by the billions of dollars poured into the industry so far, and important developments will no doubt continue in the space. This is why it’s important to not throw the baby out with the bathwater and to hold a longer-term view when considering the immense potential that blockchain technology has yet to fulfill.
Author’s disclosure: TravelX, Flipkart and ANZ are clients of Fireblocks.