I am convinced that the future of finance lies in the wider adoption of public blockchains, writes Jan Brzezek in an article for finews.first.
This article has been published on finews.first, a forum for writers specializing in economic and financial topics.
I expect every bank in Switzerland to offer cryptocurrencies in the next two years and every bank in Europe in the next five years. They will then evolve to tokenize assets such as art and real estate within 10 to 15 years. And finally, I believe decentralized finance (DeFi) based on blockchain technology has the potential to transform the entire banking value chain over the next 30 years, bringing the benefits of lower fees and increased transparency to all aspects of finance.
While cryptocurrencies are known for their volatility, blockchain technology can actually help make the financial system more robust. 2023’s wave of bank failures has revealed how e-banking apps and real-time withdrawals have made banks more vulnerable. But using smart contracts instead of traditional settlement methods will reduce counterparty risk by making the settlement immediately, rather than it taking two days. Moreover, it will increase transparency at a time when finance is becoming increasingly complex.
“What will it take for traditional finance and crypto finance to converge?”
The potential of decentralized finance (DeFi) is enormous across lending, borrowing and investments. The most tangible use case is digital assets like Bitcoin, which can be transferred around the world 24 hours a day, seven days a week. But beyond that are tokenized assets. They allow you to issue a token in less bankable assets such as art, cars or houses. With the expansion of ebanking, you can have a wealth portal that includes all of a person’s assets. Customers would start interacting with their banks completely differently, in a much more passionate way.
In terms of intellectual property, tokenization will enable a pharmaceutical company to directly fund expensive research and development. Right now, if you want to invest in the development of a COVID-19 vaccine, for example, you have to invest in Pfizer. But Pfizer can issue tokens against specific drug development programs, which investors can then buy.
What will it take for traditional finance and crypto finance to converge? Regulation of digital assets is the most important first step. Just a few weeks ago, the EU introduced its well-designed Markets in Crypto Assets (MiCA) Regulation: a game changer that will lead to a wave of product innovation. Both the UK and Hong Kong are also drafting regulations, while the US has unfortunately so far not agreed on a specific way forward.
“For DeFi to achieve its full potential, there must be interoperability between blockchains”
Europe’s financial institutions have largely waited for regulatory certainty before offering cryptocurrencies to their customers, the first step towards convergence. Now many of them will do so, catching up with the many Swiss financial intermediaries that started offering such services after Switzerland introduced crypto regulations in 2021.
Regulation will lead to consolidation as smaller, offshore crypto firms close or merge with more established firms that can comply with the new requirements. At the same time, some large established financial companies are entering the market. They can afford to pay less or scale up better than start-ups.
Cooperation is also necessary for convergence. Traditional finance needs to work with DeFi, recognizing the benefits of adopting blockchain technology. Deutsche Börse’s 2021 acquisition of Crypto Finance is a sign of things to come. The group monitors various areas with the aim of buying well-run companies that can expand their existing value chain. Much of the trade and post-trade operations can be run on the blockchain for years to come, increasing efficiency, reducing costs and increasing transparency.
But for DeFi to achieve its full potential, there must be interoperability between blockchains with different use cases. For example, secure bridges must merge central banks’ digital currencies, stablecoins and smart contract platforms.
“It’s going to be a complex process”
I would be surprised if any bank or asset management company’s board did not investigate the potential of cryptoassets, tokenization or blockchain technology in general. It is clear to me that the adoption rate is increasing. People have realized that digital assets and their underlying technology are not going away. So they’re looking for ways to incorporate that into their business models.
It is an opportunity to embrace the best of traditional finance and crypto finance. Over time, blockchain technology will transform traditional finance, helping to reduce risk in the system. But it is going to be a complex process, requiring time, risk-taking and the willingness of all stakeholders to innovate.
Jan Brzezek is CEO and founder of Swiss-based Crypto Finance and board member of Crypto Finance (Asset Management). In 2017, he started his journey as a first-generation entrepreneur and founded Crypto Finance. Today, the firm is a Finma-regulated financial institution and member of the Deutsche Börse Group, and offers digital asset solutions in asset management, brokerage, custody, infrastructure and tokenization for financial institutions. An alumnus of Zurich University of Applied Sciences and UBS Asset Management, Wealth Management and Investment Bank, he has extensive experience in the sector and has led several complex global projects during his time at UBS and SIX Swiss Exchange.
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