The move of digital assets into mainstream adoption is gathering pace, underpinned by the evolution of distributed ledger technology (DLT), most notably the blockchain. This technology holds great power to revolutionise the entire financial services industry and, if its growth is managed responsibly, can be a catalyst for the creation of a new digital asset ecosystem with considerable social, business and sustainability benefits.

The nascent nature of the industry also brings the vital need for enhanced industry and regulatory cooperation to ensure rigorous governance, risk management, and transparency measures. The OECD defines responsible business conduct as “contributing to economic, environmental and social progress” as well as offsetting any volatility or negative impact. A responsible and thoughtful approach is the only way to harness blockchain technology and digital assets to their fullest potential in the financial arena and mitigate the risk that accompanies any major innovation.

The evolving regulatory landscape

Despite being a fast-growing market, the majority of cryptoassets are not accounted for within existing regulatory parameters – and a unified approach is exactly what the industry needs to further thrive. A Deloitte report highlights that 50%-75% of financial services organisations in the EMEA region are considering investments relating to digital assets or blockchain. Of the respondents, 76% ‘agree’ or ‘strongly agree’ that a “uniform global regulatory response will be critical to digital assets becoming more mainstream.”

Although at an early stage, there is positive movement happening. In Europe, the emerging Markets in Crypto-Assets (MiCA) regulation has scope to support the industry’s growth and minimise risk. The UK government, meanwhile, noted that the rapid growth of the cryptoassets and DLT sector was further spurred on by the pandemic effect. Having recognised the potential to disrupt capital markets and the future of other industries, the UK launched a Taskforce to explore not only the possibilities but also how to resolve challenges and instil robust regulatory oversight. In its position as a global hub of innovation, the UK has the chance to lead on guidance that promotes market integrity.

The emergence of a new business model

The benefits of a more digitally enabled industry are manifold. For banks – using DLTs, including blockchain, enables them to adapt their business models for the new digital economy. One way to tap into the benefits is by transitioning to a digital platform model, a trend already underway as a result of widespread digitalisation. In Europe, according to the EBA the “platformisation” of the EU’s financial sector gained traction due to the pandemic crisis and is set to keep growing.

It’s easier to integrate additional building blocks into a blockchain-powered platform (heralding faster route to market and new revenue streams for services such as payments, credit, savings, insurance, and more) through the use of APIs, much more seamlessly than with older banking models. Many traditional players are held back by legacy infrastructure that leads to cost and operational inefficiencies, data siloes and less visibility of risk factors. Embracing a new paradigm for digital assets and blockchain opens the door to cost reduction, new audience segments and, thus, strengthens market resilience and competitive edge. It’s a nimbler model.

At its core, blockchain technology was premised on facilitating immutable, verifiable transactions and, as summarised by OMFIF, DLT more generally can address pain points for the financial services industry – “security, speed, transparency and traceability, risk and cost management.”

Factoring in ESG considerations

Having covered the potential payoffs for industry participants, we come to a crucial point – reconciling the advent of blockchain and digital assets (and the increasing regulatory scrutiny thereof) with the ESG factors that are rising to the top of the agenda for institutional investors, the wider international financial community and world leaders.

Headlines have deliberated the environmental implications of the industry, in light of the carbon footprint of crypto mining activities, with calls for greater reliance on renewable energy. As investors show more interest in digital assets, any regulatory regime must incorporate measures for architecting a sustainable ecosystem – this fits the tenets of responsible conduct and would inspire trust and buy-in.

The social impact, too, can be significant, breaking down barriers to access to the full spectrum of financial services, democratising investment across a wider range of asset classes, new modes of payments, financial inclusion and improved liquidity; plus low-cost, instantaneous and frictionless cross-border transactions. At the macro level, it can bring new avenues for wealth creation in economies where such opportunities did not exist.

Overall, the tamper proof credentials of DLT are highly impressive, and can boost platforms’ regulatory compliance and reporting practices. Nevertheless, it’s necessary to address threats such as fraud, cyber-attacks, and the potential for bad actors to compromise personal data security that can come from the pseudo-anonymity of decentralised public blockchains. Responsibility for conducting due diligence on how data is processed and building adequate safeguards falls to the industry but must start at the top, with regulators pushing for strong governance standards.

What are the next steps?

I believe that investors, established organisations and retail adopters of digital assets will only continue to increase their exposure to digital assets over the next few years. While the industry, and the blockchain technology that underpins it, is in the early stages of its maturity, it’s important to realise that the nature of blockchain and digital assets transcends borders. As such, it requires standardised definitions and a cohesive, collaborative drive by national policymakers, regulatory authorities and the financial industry in setting up a solid legislative framework rooted in responsible practices and transparency. This should be complemented, but not replaced, by self-governance within the industry itself as an extra layer of accountability when it comes to key issues like sustainability and data protection.

The success of a new financial ecosystem depends on clear and consistent guidance that’s agile enough to adapt to a fast-shifting market and technologies.