Digital Asset Adoption Series
Welcome to my first article in our Digital Adoption Series. In this article I’ll lay the foundations for blockchain and digital assets. In follow on articles we’ll deep dive into specific industry sectors and use cases, and where we expect to see the most traction.
As many asset managers and investment professionals explore the universe of digital assets we often hear discussions why they are such an important and novel instrument. Why do we need digital assets when we already have fully functioning assets in electronic format?
The good news is that yes the world does function as it is, although not so smoothly and seamlessly. The technological advancement can reshape antiquated, less efficient, paper based structures, and on top of it save costs for participants and end users. That only should be enough to pursue the new technological solutions. However, there is much more to the new digital assets, and their place in the new economic paradigm. Let us take a deep dive into digital assets and where are we in the adoption cycle.
Blockchain or DLT technology entered the scene a decade ago set on solving several significant challenges in the world of the digital economy, or how some populist call it, the internet economy, such as security, trust, concentration of control, old world monies, and old world assets.
Many of these challenges have been tackled in parallel, and we have witnessed many proofs-of-concept (POC) in the past decade, let me just mention Bitcoin for example. Needless to say this technological innovation is unparalleled in its speed of delivery.
Let me use here a famous example of how long it took the internet to develop, from the first days of MIT’s J.C.R. Licklider “Intergalactic Network’ the world needed 30 years before ARPANET’s TCP/IP adoption went mainstream. That is why it does not come as a surprise to see that digital asset adoption is developing faster than anticipated.
What can be a digital asset?
If in the first place we assume that asset is a store of wealth or at some point a store of value, then digital assets can be any of the ‘old-fashioned assets’ such as: cash, public equity, commodities, tradable real estate, debt, collectables, commodities, derivative assets or alternative assets.
Apart from these type of assets we might see an increase in private equity assets (which historically have been notoriously poorly recorded); and thanks to the potential of fractional ownership, a wider spectre of real estate assets including and not limited to the real estate investment trust structures (known as REITs); or creative assets from entertainment and sports industry (copyrights, music rights, brands etc); to simply the upcoming creative cross classes. We hope that the future is going to bring many novelties as a digital format will be more suitable to support them.
Why digital assets? Most of the assets are already electronic, aren’t they?
Most assets became fully or partially electronic in the 80s or 90s. Not many people remember nowadays the ‘open outcry’ trading floors as they went into history in the 80s. However, despite this digitization, the processes around asset trading are surprisingly old-fashioned, paper-based, inefficient, time-consuming and expensive for any active and high velocity investing activity.
Digital assets offer a new way to organize the security value chain from issuance to custody, by improving security or registry of the assets and speed and ease of transfer, while being more cost effective. They not only solve the efficiency of existing electronic formats and improve processes, they can also increase the multi-asset universes, enhance liquidity or offer fractional ownership which was not previously possible.
When will digital assets reach mass adoption?
We have to look at this from two angles, the market dynamics and the internal dynamics of the existing legacy systems. Despite the common belief that new technologies do not have competition, they often do, and in most cases the competition can be found amongst the existing functional systems or within the inefficient and obsolete systems they try to disrupt.
The key truth is – if there is no competition there is no market. To a certain extent this can be said for the digital assets. These competitive spaces will be adjusting and adopting new technologies in a same way or sometimes even faster albeit less creative than new comers.
The actual moment when digital assets will ‘cross the chasm’, as per technology adoption life cycle inspired by Geoffrey Moore’s book ‘Crossing the Chasm’, is the moment when the critical mass of innovators meet the ‘zero cost zone’ of all those companies in the transformation cycle of legacy systems. In reality this means that transformation will be pushed from the inside and the outside. New technology will bring new players, and some of the existing players will adjust and adopt new technology and chasm will be bridged.
Digital assets have been pushed hard by the innovators at this early stage. We have witnessed the build up of infrastructure by both start-ups and corporations such as token issuance platforms and custodian services.
In 2020 the general conception is that we shall see another year of infrastructure build up. Although we have seen some interesting issuances, a significant number of quality issuances will follow once the infrastructure, as well as the clear legal and regulatory framework, is fully shaped up.
The digital asset adoption curve as we see it in Digital Asset Network:
In order to achieve rapid mass adoption, digital assets have to provide what Amazon or Alibaba did for their customers:
- Offer much better choice for investors (wider multi-asset offering, promise of liquidity etc)
- Lower cost (transaction and issuance costs, auditing and transparency costs)
- Safe environment (legal and regulatory clarity, participants and end-user protection)
- Higher speed and more comfortable services (among other things more user friendly wallets, cold storage etc).
At the moment there are multiple barriers to adoption and some of the challenges that the digital asset industry is facing, among other things are the lack of standardization, to some level the regulatory uncertainties (although a lot of good work has been done in this field), and absence of collaboration between market participants.