With a resurgence in investor interest, a new asset class is known as “digital assets” has evolved. These assets are the digital analogs of financial assets such as stocks, currencies, properties, or commodities. For instance, compared to USD 260 billion and USD 20 billion in early 2017, the overall market value of cryptocurrencies dramatically rose to a staggering USD 2 trillion in May 2021.

Digital assets: what are they?

Equities, bonds, derivatives, exchange-traded funds (ETFs), and non-financial assets like crafts, real estate, and cars can all be represented by digital assets. Through shortened TATs (turnaround times) and automation, digitalization of illiquid assets, such as private equity, can increase asset accessibility and lower investment life cycle costs.

A capital market based on digital assets eliminates investor concerns about asset availability while lowering capital requirements and speeding up international cash transfers. Additionally, it aids in the elimination of inefficiencies that result in delays and extra costs.

Adoption in different markets

The vast majority of investors see digital assets favorably. Across all markets, demand for digital assets is rising quickly. A significant financial services company found that traditional investors like hedge funds and family offices have boosted their exposure to digital assets across all major markets.

View of regulators

Regulators have acknowledged the necessity and, in response, have developed laws for the issuance and trade of digital assets. In this situation, regulations are increasing.

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Early adopters of digital assets

The introduction of digital assets has various effects on the financial market participants. We try to understand how different businesses’ operations are impacted. I picture the following parties participating first:

Custodians

For these assets, custodians can provide custody services. A cryptographic key, which effectively functions as a digital bearer instrument and gives the holder complete control of the purchase, secures digital assets.

Custodians proficient in managing private keys can provide services for various assets, including non-fungible tokens, stocks, real estate, and cryptocurrencies (NFT). These cryptographic keys must be kept secure by custodians on the client’s behalf. Numerous custodians, including BNY Mellon, have announced the creation of a platform for digital asset administration and custody.

Bank investments

As a new asset class, digital assets can offer a new source of income. Investment banks are anticipated to advise clients to hold a modest amount of this asset class given the regulatory uncertainty and risks. Greater operational efficiency for investment banks is possible because of quicker settlement, less reconciliation, and better liquidity. However, the disintermediation caused by the advent of new trading venues may affect investment banks.

Dealer brokers

New revenue sources like prime brokerage for crypto assets and custody may be advantageous for broker-dealers. The need for fewer reconciliations and speedier settlements on digital assets makes broker-dealer operations more efficient and straightforward.

Issuers

Retail investors are now making early investments in the asset class known as digital assets. There are numerous advantages to comparing a digital asset issuance to a traditional asset issuance. Issuers could develop NFTs to offer higher liquidity and lower transaction costs.

Investors

Investors can acquire a portion of both financial and non-financial assets with the help of digital assets, which increase liquidity and speed up settlement.

Manager of assets

Greater operational efficiency for asset managers and possible chances for new revenue from new asset classes is both brought about by digital assets.

Exchanges

Trading in new asset classes can be advantageous to exchanges. Tokens for a variety of non-financial assets can be traded. The Swiss regulator has given SIX Digital Exchange (SDX) permission to run a stock exchange and a central securities depository for digital assets.

Central securities depository: market infrastructure (CSD)

Market infrastructure companies will increase operational efficiency, operate blockchain platforms, and benefit from clearing and settling transactions in novel asset classes. However, disintermediation may result in a loss of new business. The centralized infrastructure will persist with distributed ledger technology, facilitating more unique enterprises.

Also, read – 5 Reasons Why Cryptocurrency Market Requires Capital Framework.

Conclusion

Regulators previously lacked clarity about the deployment of digital technology, but they now acknowledge the necessity of taking digital action. In the coming years, digital assets will become commonplace and well-liked.