Why are digital assets the future?

Digital assets have been one of the most talked-about innovations in financial services and the broader economy since the introduction of Bitcoin and Blockchain in 2008. Although digital assets existed before Blockchain and can survive without it, in this article, we concentrate on their depth and sophistication in the evolving field of Blockchain- what are digital assets, their history, their potential, the challenges they face, and problems.

The modern digital asset landscape is incredibly complex. Digital assets may represent almost everything, ranging from real properties, shares, and property to more intangible things such as citizenship, identification or substantive attestations.

Thanks to Blockchain, practically anyone with a technical background can build digital assets, a process commonly referred to as ‘tokenization,’ which can be distributed in a variety of inventive ways. Blockchain technology also allows trading on secondary markets simple, but adds new concepts and presents unique challenges when it comes to asset custody. Digital assets can now be programmed thanks to smart contract technology operating on Blockchain, by introducing new features that are not possible through conventional means of issuing and exchanging assets.

Categories of Digital Assets

1. Payment/Currency Tokens: Often called ‘Virtual Currencies’ or ‘Cryptocurrencies’, currency tokens usually do not grant privileges (as is the case with investment or utility tokens) but are used as a means of exchange (for example, to allow the purchase or sale of a good offered by anyone other than the token’s issuer), or for investment or value storage purposes.
2. Investment/Security Tokens: Typically offer rights (e.g. in the form of ownership rights and equivalent entitlements to dividends or coupons). For instance, in the sense of capital raising, asset tokens can be issued through a Security Token Offering (STO) that allows companies to raise capital for their ventures by issuing digital tokens in exchange for fiat money or other digital assets.
3. Utility/Consumption Tokens: These usually require access to a particular product or service, often provided using a Distributed Ledger Technology platform, but are not approved for other products or services as a means of payment. For example, Provision of a token for ease of access in the context of cloud services.

Benefits of Digital Assets

1. Transparency: Smart contracts program digital assets to behave under strict constraints that they can not bypass. Anyone who accesses the Blockchain and has the requisite technical skills can observe and check. Such automation prevents unexpected and undesirable happenings from occurring. The best example for this is Facebook facing public criticism and getting slammed by senators for refusing to interfere in Russia’s interference by massive U.S. tech giant ad purchases in the U.S. election in 2016.
2. Reliability: The distributed transaction ledger becomes the “single version of the truth” on which a substantial sample of participants can rely but which none of them can regulate unilaterally. This system helps to foster trust in the information being exchanged in a very long chain of partners, intermediaries, and competitors.
3. Legal Security: Once smart contracts are written correctly and implemented, programmability and automation support — indeed, even reinforce– compliance with existing regulations.

Hurdles in the adoption of Digital Assets

1. Cost of Technical Innovation: Financial factors may hinder a mass adoption of digital assets. Nevertheless, if innovation improves productivity, businesses may prefer the “status quo” rather than significant investment in new infrastructures. It is more likely that when the funding needed is high, which is usually proportionate to the difficulty of integration into existing structures. The relative change is not perceived to be adequately significant compared with financial expenditure.
2. The difficulty of onboarding users and investors: For the average user, Blockchain is relatively difficult to understand. This difficulty can be detrimental to the acceptance of Blockchain technology and related use cases if prospective consumers do not entirely appreciate its benefits. Therefore, it would be a challenge for digital asset ventures to get significant numbers of users onboard beyond early adopters. The best way to solve this issue is to make sure that the principles of digital assets are easy to grasp. Such an educational initiative would be in the hands of both developers and educational organizations, which should focus more on the whole new technology.
3. Banks’ reluctance to support the growth of digital assets — Digital asset ventures have had enormous difficulties attempting to open bank accounts or access other financial facilities. Today, most banks flatly decline to enter into business partnerships with Blockchain entrepreneurs. They also reject transfers from trading platforms which allow digital assets to be purchased and sold against legal tender currencies. For token issuers who have raised digital assets to fund their projects, this is a significant problem. Most digital asset projects are then left without financing, and it also affects people whose remuneration in digital assets is paid.

The future of investing is Digital

Tokenized assets enabled by Distributed Ledger Technologies (DLT) unify intermediaries on the capital market and reduce costs for issuers and investors due to optimized issuance, distribution, trading, instant settlement and automated lifecycle management.

Clients may choose to handle their private keys through banks, and wealth/asset manager of their trust due to lack of confidence in other solutions. This is where custodial facilities such as custodial transfers, third-party custodians, and self-custody by institutions and service provider come in. Custodial exchanges have specific pros and cons. Advantages being the exchanges having direct market access, while disadvantages are security and regulatory risks. Third-party custodians, on the other hand, have asset protection (insurance) in the first place and also have audited solutions which prove better than self-custody.

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