The Banking Executive Magazine - October Issue 2022

Virtual Assets Market Growth and Adoption ISSUE 166 OCTOBER 2022 the BANKING EXECUTIVE 33 the growth of the global virtual assets market. Governments and central banks around the world implemented expansionary fiscal policy and accommodative monetary policy to stimulate the economy in coping with the COVID- 19 crisis. This has increased market liquidity and subsequently demand for virtual assets. In addition, as blockchain technology is employed in various fields centered around smart contracts, the blockchain ecosystem is expanding through the creation of new industries such as NFT (Non-Fungible Token) and DeFi (Decentralized Finance) leading to an increase in demand for virtual assets. According to South China Morning post and global market intelligence report by International Data Corporation IDC, interest in cryptocurrencies is growing, with the cost of bitcoin, the world’s largest cryptocurrency, rising above the US$50,000 in August 2022 after the value fell in May 2022. The value of other coins including ethereum and dogecoin is also rising. Interest in technology - led innovations for virtual assets has increased with rising investment. Direct blockchain spending alone has risen over 50% in 2021 compared to its value in year 2020 and is expected to exceed US$19 billion in 2024. According to Statista analysis, growing interest in cryptocurrencies, including bitcoin and ethereum, has led to more than 75 million people around the world to use blockchain wallets – digital wallets which can store and manage cryptocurrencies. According to Allied Market Research analysis, increased investment in digitisation and cryptocurrencies means that the global cryptocurrency asset management market offers huge untapped growth potential. VIRTUAL ASSETS AND DIGITAL TRANSFORMATION According to PwC, inventions and innovations of the digital age, which began in the 1970s, has resulted in a paradigm shift in economies, culture, work style, education, health, investing, and everything is becoming smarter. Similarly, financial technology is driving innovation in financial markets globally and bringing with it the emergence of virtual asset markets. With many individuals interacting with virtual assets on a daily basis, from investing in crypto as a virtual asset to digitisation of existing investment assets, the virtual assets market is becoming integrated in the existing fabric of traditional financial markets. The market structure of the virtual asset space initially built around retail, high-net-worth, and crypto- native investors has expanded with traditional institutional investors who are including virtual assets into their existing portfolio of traditional investments. Moreover, monetary authorities around the world are adopting digital currencies as a legal tender or introducing a digital version of their countries’ currency. BENEFITS OF VIRTUAL ASSETS TO THE DOMESTIC ECONOMY According to PwC, there are lots of untapped opportunities within the domestic economy that virtual assets could unlock and which would be beneficial to the entire value chain. New forms of value could be created through innovation in the virtual assets market leading to a massive change in the financial landscape of the domestic economy. Some of the potential benefits include: Asset tokenisation: The fractionalisation of high valued conventional/illiquid assets such as equity securities, real estate, commodities, and loans offer retail investors greater access to a wider pool of investments which they could not normally afford to buy, as they can now purchase smaller denominations in digital token form. This has the potential to drive greater liquidity across the capital markets. Portfolio diversification: Virtual assets could provide diversification benefits when added to a portfolio of traditional assets, as virtual assets have historically had low correlations with traditional assets. Convenience of payment services: Central Bank Digital Currencies (CBDCs), have the ability to achieve faster payments through instant settlements. This would strengthen the competition for retail and cross- border payment services and help