12th Oct 2021 by Graham Buck
Bank of America (BoA) has published an upbeat assessment of the future prospects of digital assets, including cryptocurrencies to mark the opening of its digital asset research division.
A 140-page report, Digital Assets Primer: Only the first inning by Alkesh Shah, the bank's head of Global Cryptocurrency and Digital Asset Strategy, assesses Bitcoin and other cryptocurrencies, central bank digital currencies (CBDCs), non-fungible tokens (NFTs), decentralised finance (DeFi) and other topics.
The report notes that digital assets represent a US$2 trillion+ market value with over 200m users, and have the potential to transform every industry by improving efficiency and reducing friction across transactions. Hundreds of companies are forming within this new ecosystem, creating a new asset class.
The primer promises to provide "an investment framework for the digital asset landscape, looking through a variety of lenses: tokens that act like operating systems; applications powered by smart contracts; stablecoins pegged to fiat currencies; CBDCs that could replace money; and NFTs that connect creators and fans in a different way.”
“Bitcoin is important,” said Shah, “but the digital asset ecosystem is so much more. Our research aims to explore the implications across industries including finance, technology, supply chains, social media and gaming.”
Potential of CBDCs
The report notes that as of June this year, 221m people have purchased or sold a cryptocurrency against just 66m in May 2020. “It’s difficult to overstate how transformative blockchain technology, digital assets and the thousands of decentralised apps that have yet to be created could potentially be,” the authors comment.
In other chapters they consider the increasing relevance of stablecoins and the potential of CBDCs. The top six stablecoins by market capitalisation reached a combined value of US$115bn and settled US$2.8trn of transactions in the first half of 2021, according to the report.
The introduction of CBDCs is regarded as a question of "when" rather than "if". The report notes that governments and regulators globally have stepped up efforts to limit usage of digital assets, as adoption and use have increased. Among the key issues that both appear to be focused on revolve around anti- money laundering (AML) and know your client (KYC), mitigating potential bank runs, taxation and liability. A central bank-issued/managed CBDC “would address these issues, while maintaining central bank monetary policy control.” it suggests.
NFTs and DeFi
On the issue of NFTs, the authors note that they are already employed for both art and gaming and consider other potential use cases. “NFTs can be used instead of deeds, titles or anything currently needed to demonstrate ownership — and all without a middleman charging a fee,” they add.
Perhaps more surprisingly, the report is also positive on the likely growth of DeFi, even though decentralised finance could undermine the business model of BoA and its peers by enabling users to carry out many of the functions of a traditional bank such as borrowing, lending and earning attractive yields themselves. “The SEC is investigating DeFi applications and companies to determine if and how they should bring them into the current regulatory framework," note the authors. "We are optimistic about the long-term growth of this segment as it matures and regulatory uncertainty is clarified.”
Throughout the report, regulatory risk is identified as the main obstacle to growth in the near-term. But this is offset by the likelihood that in the long-run, clarity from regulators will allow new entrants to participate in the emerging asset class.
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