Digital financial technology holds many transformative possibilities. Distributed ledger technology (DLT), known for its use in blockchain, is instrumental in digital bond issuance. This could over time reduce the need for intermediaries in the issuance process, thereby increasing operational efficiency and reducing costs. Distributed ledger technology is also the basis for real-world asset (RWA) tokenization, which could make it easier to buy and sell certain financial products.
However, Moody’s believes that distributed ledger-based technologies and platforms will need to overcome several key hurdles to realize these benefits and become more widely adopted. These include a lack of interoperability and standardization between systems using distributed ledger technology, a lack of reliable digital cash options, and regulatory uncertainty and technology risks.
More institutions are working on blockchain
In recent months, a growing number of institutions have begun working with permissionless blockchains for both pilot research and actual transactions. Many of these entities choose the Ethereum blockchain given its extensive ecosystem of applications and networks that have developed their own user base and product offerings over the past few years. As an open source public blockchain, the Ethereum blockchain provides a basic blockchain layer on top of which developers can build solutions for sharing data and value with other networks.
The Ethereum blockchain has become a popular platform for issuing digital bonds due to its flexible design and multi-year upgrade plans, including those that improve interoperability. Major institutions such as the European Investment Bank have issued bonds on the Ethereum blockchain, including a Moody’s 2023 rated digital green bond (€10 million issued by Société Générale). A senior unsecured digital green bond worth approximately 1.55 billion yen (exchanged at 155 yen per euro) was also issued on the Ethereum blockchain. Over time, Moody’s expects the connection between public blockchain networks like Ethereum and traditional infrastructure to strengthen, thereby strengthening blockchain use cases and driving industry growth.
Asset tokenization becomes popular
Asset tokenization – converting assets such as funds, real estate or art into digital tokens that can be stored and transferred using distributed ledger technology – has become popular over the past year. The total amount of real assets tokenized on public blockchains has increased from $1 billion to $2 billion (140 billion yen, equivalent to 140 yen to the dollar) in the past 12 months, and the majority of this is currently on the Ethereum block. It’s on the chain. One of the factors slowing the adoption of tokenization is the lack of reliable digital cash. Therefore, market participants are settling transactions off-chain or using stablecoins.
Stablecoins are crypto assets whose price is pegged to a reference asset such as a fiat currency, and are a type of digital cash, but stablecoins do not always remain pegged in stressful market environments. However, two other digital cash that could address the current vulnerabilities of stablecoins are tokenized bank deposits and central bank digital currencies (CBDCs). In Moody’s view, the development of tokenized bank deposits and CBDCs will continue to advance in 2024, although the extent of their relationship with public blockchains remains unclear.
Regulators work on framework development
Legal clarity could also improve in 2024 as regulators develop frameworks to support new digital assets and services, although not all regions are progressing at the same pace. Moody’s sees this as highly sensitive. Regions such as the European Union (EU), Singapore and the United Arab Emirates (UAE) are all likely to attract more investors as a result of new customer and investor protections and new licensing regimes for digital assets. . Meanwhile, the United States is likely to continue to use regulatory enforcement actions to establish precedent in digital asset markets, and the development of a digital asset framework remains a distant goal.
｜Translation and editing: Rinan Hayashi
｜Original text: Ethereum Emerges as a Key Blockchain for Tokenized Real-World Assets