Three Predictions For The Year Ahead In Digital Finance

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Trust takes center stage, DeFi meets CeFi, and CBDC proponents either go silent or go silent.

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It is fair to say that the unlicensed crypto world was all going on in the blockchain space in 2021. But that doesn’t mean those of us working to bring advanced cryptographic technologies to the business world rested.

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Indeed, and despite the ongoing challenges of the pandemic, 2021 was a year of significant progress for the digitization of capital markets. 2022 will be another unprecedented year in fintech – and the following three trends are set to continue to reshape the landscape for market participants, governments, regulators and infrastructure providers over the next 12 months.

1. The quest for trust will dominate the digital realm

We never think about it in our daily lives but the ability to develop trust in each other in the real world is what uniquely highlights the potential of humanity. Faith is the cornerstone of human civilization.

And as more and more of our personal and professional lives move into the digital realm, a lack of trust in the digital sphere is a trillion-dollar problem that the industry will have to tackle in 2022.

Faith allows us to do things that would have been nearly impossible if we had to verify everything for ourselves. Can you imagine, for example, aviation if you can’t trust the airline’s security engineers? And how many times have you relied on a trusted brand when searching for food in an unfamiliar place? Imagine if you had to check the ingredients yourself before tucking in! Simply put: if we can trust, we don’t have to verify.

How could commercial enterprise ever go beyond immediate family if we had no mechanisms to develop trust in strangers? Ultimately, trust is the fundamental driver of business. And business is what creates wealth. That’s why I say that faith is the basis of civilization. In short, the fact that humans can develop trust in each other explains the dazzling opportunities, wealth and standard of living that many of us can enjoy. But consider how little trust is in the digital realm.

In the early days of the web, you had no way of knowing if your browser was actually talking to the company you thought it was. Hence, eCommerce and online banking struggled to take off. But the advent of the browser padlock — literally creating confidence that you’re connected to what you think — provided a trillion-dollar opportunity. Until recently, firms doing business with each other had no way of knowing whether they had identical records. And so they wasted a staggering amount of money to reconcile with each other. Blockchains are really solving this problem by creating the belief that “I know what I see is what you see.”

But there’s a lot more to do – and that’s where the tech industry should focus its attention in 2022 and beyond. For example, when you send information to a third party, you have no technical way of knowing what they will do with your information. So you’ll have to spend a fortune on ‘data scrubbing’ or audits… or, more likely, you don’t share sensitive data at all. It is amazing to imagine how many opportunities are lost to create new value or serve customers better because we cannot trust how our information will be processed when it is in someone else’s hands.

One day we will look back in awe at how much we have managed to achieve in the digital space when the level of digital trust was so low. But things are changing: the technology of trust has arrived. Blockchain, confidential computing and applied cryptography are convergent, and companies are applying it to massively increase the level of trust that exists within and between firms of all sizes operating in the digital sector.

The distribution of trust in all areas of our digital lives will drive the next wave of human advancement – ​​and that begins today.

2. The Lines Between DeFi and CeFi Will Keep Blurring

Interest in decentralized finance, or ‘DeFi’, is booming in the technology world, and this interest peaked last year. The word invites enthusiasm, doubt and curiosity alike. But I have no doubt that the technology could host a host of exciting applications (assuming those grown in that space can outdo the grifters). At its core, DeFi rests on the central principle of arbitrage, and can have many benefits – namely, the democratization of finance.

But let’s not get ahead of ourselves. The idea that DeFi is set to replace the existing, centralized or traditional financial system, or ‘CEFI’, is wildly exaggerated, especially at a time when governments are increasingly adapting to regulated financial markets and institutions.

However, as well, we are already seeing existing financial firms and market infrastructure adopting some of the insights and breakthroughs from the decentralized world – for example DTCC’s Ion Kama and the Swiss digital exchange, SDX – so we You can imagine both. Trends Coming Together and Strengthening Each Other in 2022: DeFi will mature and coexist with the financial services ecosystem we know and trust as it develops.

3. CBDCs Will Get Even Closer to Real World Deployment

2022 will be the year when CBDCs will receive clear, policy-based direction and guidance. We’ll find out if any central bank is courageous enough to launch a true digital equivalent of cash. The pursuit of CBDCs, both at the wholesale and retail level, is now being pursued to varying degrees by countries around the world. For example, Riksbank has been working on its ‘e-krona’ in Sweden for some time now.

One of the uses of CBDCs that has received less attention recently is their use in cross-border settlements. In December, Project Jura successfully settled the “real-life” transfer of securities and cash between France and Switzerland with a wholesale CBDC.

2022 will be the year of actual maturity for the CBDC. They are now understood by jurisdiction and this year, policymakers will come off the fence and tell us: Will we as citizens be allowed to make digital payments with the same freedoms that we can them in the real world? Yes or no? We will find the answer in 2022 and that will unlock everything – as we then know what to do and what to build.


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