Strategic Partnerships and Ecosystems
Blockchain Hub, Raiffeisen Bank International AG
Entering 2024, cryptocurrencies are making headlines. The crypto market is currently vibrant, with a particular focus on cryptocurrency prices. This surge can be attributed to the decision on Bitcoin ETF in the US and the anticipated BTC halving around April 2024. What other developments in crypto and blockchain space can be expected in 2024?
Update on Bitcoin
Bitcoin emerged in 2008 as the first cryptocurrency, followed by many more, and has since then been established as a new asset class, receiving investments from the side of institutional investors as well. Its position has also been solidified with the recent decision on allowing Bitcoin spot ETFs in the United States. Bitcoin is primarily considered an investment in “digital gold”, but there are also some additional potential use cases for it (inscriptions, remittance, smart contract platforms). On the other hand, cryptocurrencies and blockchains such as Ether are not viewed primarily as “digital gold” but are designed to serve various other utility purposes: from providing networks where users can build their own (decentralized) apps to serving as governance tokens for different applications. Most of the developments in the area of these additional value propositions are done on infrastructure levels making blockchains more scalable (secondary blockchain built on top, so-called layer 2s), more abstract and user-friendly (not a lot of technical background will be shown to the end users, e.g. account abstraction or development in the wallet space). While these developments are substantial, we have to admit that currently there is still no application that would serve a mass consumer market.
What about NFTs and Metaverse?
The (trading) activity around Non-Fungible Tokens (NFTs, digital assets on the basis of a blockchain) has stagnated in 2023, to the point where we could call the attention that the topic received in 2022 a “hype”. However, NFTs still have a future – especially if used for loyalty programs, or to ensure the provenance of the asset (creating a digital twin). The hype around metaverse has calmed down as well: although there are some good fields of application for the metaverse, these areas will probably be limited.
After DeFi summer in 2020, Decentralized Finance (DeFi) has been stagnating in terms of adoption. Currently, it´s still mostly limited to the crypto-natives; however, we believe that it will converge with traditional finance, especially by bringing more compliance into the space.
Did AI hype replace the blockchain buzz?
The year 2023 was marked by developments in the AI technology, which meant that AI took most of the media attention away from blockchain. However, this doesn´t mean that AI and blockchain are competing technologies: they address different pain-points and will coexist in the future. For example, while blockchain is in its essence a technology focused on storing and managing data, AI (and especially Generative AI) can be utilized to provide a better user experience. With the rise of Generative AI and the resulting low-effort opportunities for the general public to generate and disseminate content, it can be expected that more deep fakes will appear. This is just one of the fields of application where blockchain technology can be combined with AI, to ensure that a data source is correct.
After the collapse of a crypto exchange FTX corporates and governments realized that more regulation is necessary. A lot has happened in 2023 in the EU: Markets in Crypto Assets (MiCA) and Distributed Ledger Technology Regulatory and Policy Recommendations (DLT PRR) came into force. Both of these regulations provide regulatory clarity, which in turn also enables higher adoption. No significant EU regulation (except for more detailed implementation legislation) should be expected in 2024, but regulatory clarity is still a problem in the US and first regulatory pieces (e.g. regulation of stablecoins) could be passed there.
Regulation gave a boost to financial institutions getting into the space, especially in jurisdictions with regulatory clarity. Banks all over the EU are building the infrastructure. Some of them have already launched their digital asset custody (DZ Bank) or at least obtained a license (Commerzbank).
Tokenization of assets is also starting to pick up, expanding to different asset classes (from bonds to fund shares or real estate). More developments should be expected in this space, resulting in less pilots and more live offerings.
There have also been many developments on the central bank digital currency side (CBDC). ECB has been working for couple of years on a retail CBDC (“digital euro”) which would be the digital version of cash for retail customers. In 2023, the project entered the next stage, which is called “preparation phase”, with the goal of laying the foundation and preparing the infrastructure for a potential digital euro implementation. It´s important to say that the decision whether the digital euro initiative will be implemented has not been taken, but it´s highly unlikely that it will be based on blockchain technology.
There have also been developments on the wholesale CBDC, a digital version of money accessible only to certain financial institutions. The ECB has started a new project and invited interested parties to participate in trials. For wholesale CBDC it´s clear that it´s going to be based on blockchain or at least connected to blockchain.
One thing that is still missing is a trusted means of on-chain payments. With stablecoins we see that most are denominated in USD, however, this is about to change due to the positive interest rate environment and regulatory clarity in the EU. Last year Societe Generale issued their own stablecoin, DWS announced a stablecoin project, and announcements of other players can be expected in 2024, even though the projects might not go live.