In the coming years, digital finance will gain further traction among financial institutions that seek operational and cost efficiencies1 through blockchain and want to expand into new asset classes. These heavily regulated firms will likely need to focus on quantifying and managing risks associated with blockchain-based platforms. In 2025 institutions will likely focus on tokenization of real world assets (RWAs), although developing viable new uses for RWAs
will largely hinge on successful integration of digital currencies. A few traditional financial firms are still expanding their crypto trading and custody services, but are taking a cautious approach.
Quantifying and managing blockchain-related risks will be increasingly important.
A growing number of traditional financial firms are exploring integration of permissioned2 networks with permissionless3 blockchains, taking advantage of smart contracts to enforce permissioning at the token level. This has increasingly led regulators to scrutinize risks associated with blockchain networks and digital assets. Over the next year, regulators and standard-setting bodies will continue working to promote best practices and harmonize industry standards. They will also continue to work with market participants on frameworks like the Regulated Liability Network4 (RLN) and Regulated Settlement Network5 (RSN) to create regulated interoperable infrastructure for tokenized assets.
Advancements in blockchain-compatible cash will boost tokenization efforts. The rise of stablecoins and money market funds issued by financial institutions will continue to bridge the gap between traditional and decentralized finance (DeFi). Wholesale central bank digital currencies (CBDCs) are advancing the issuance of digital bonds, as central bank pilot programs focus on facilitating their settlement. Tokenization of illiquid assets continues to lag, hindered by a range of obstacles.
Institutions will increasingly adopt cryptocurrencies, but view them as high risk. The global rollout of various spot exchange-traded funds (ETFs) has led Bitcoin and other top cryptocurrencies to be seen as components of a diverse portfolio. Traditional financial firms are expanding crypto trading and custody services. However, risks remain, including those related to the concentration of cryptocurrency services among a few major providers.
APAC, Europe, and the UAE have made significant strides in digital assets regulation.
Global regulation will advance in the next year, with the Asia-Pacific (APAC) region among the furthest along. Singapore and Hong Kong SAR, China are leading the APAC region in tokenization efforts and CBDC pilot programs, while European Union (EU) nations prepare to roll out the Markets in Crypto-Assets (MiCA) regulations. Dubai’s Virtual Assets Regulatory Authority (VARA) is also seeing an influx of digital asset operators applying for licenses. The US will likely expedite its regulatory and legislative progress, especially around stablecoins.
Institutions will focus more on assessing, mitigating blockchain-related risks
Quantifying and mitigating risks associated with blockchain-based systems has become increasingly important for both market participants and regulators, as highlighted by a recent report published by the Bank for International Settlements6. As blockchain adoption accelerates within traditional financial systems, it has become more complex and difficult for institutions to balance innovation and risk management. One increasingly popular solution is a hybrid approach that integrates private permissioned networks with public permissionless blockchains. Hybrid blockchains let institutions benefit from public blockchains' size, decentralization, and participation of multiple validators. However, combining public and permissioned networks has prompted heightened regulatory scrutiny because of the inherent risks in permissionless networks, including cyberattacks, market manipulation, and the absence of a central authority for recourse.
Mitigating risks associated with tokenized assets currently comes with high costs that could reduce the assets' appeal to investors. As technological solutions evolve, they could reduce the need to use certain common types of backup measures, which could help lower the cost of creating and owning tokenized assets on a hybrid network. Furthermore, improvements in the security and reliability of the technology could lead regulators to adopt a more favorable stance toward tokenized assets issued on permissionless networks, further facilitating the integration of these assets into mainstream financial systems.
Multiparty pilots and scaling platforms to accommodate RWA tokenization and DeFi growth
Recognizing the need to mitigate the technology's inherent risks, both market participants and regulators are collaborating with standard-setting bodies to create comprehensive frameworks that promote best practices in risk management for blockchain-based systems. Multiparty proof of concepts and pilots will continue to accelerate across both public and private permissioned platforms to accommodate the rapid growth of real-world tokenization use cases and decentralized finance applications.
Initiatives such as The Depository Trust & Clearing Corporation (Aa3 negative) Sandbox7 initiative, the Global Layer One8 network, RLN, RSN, as well as the EU DLT Pilot Regime9 and the recent Digital Securities Sandbox (DSS)10 in the UK reflect ongoing efforts to harmonize standards and drive innovation in a secure manner. For instance, the RLN and RSN projects aim to create a regulated, interoperable infrastructure that allows tokenized assets and liabilities to be seamlessly transferred between permissioned and permissionless networks. The DSS, launched by the UK’s Financial Conduct Authority (FCA), allows market participants to experiment with digital securities in a controlled environment, addressing regulatory and operational risks without hindering innovation. The US Treasury Collateral Network recently piloted a collateral management use case with tokenized assets on the Digital Asset platform, involving banks, investors, custodians, counterparties, and a central securities depository.11
Increasingly elaborate and complex pilots will allow traditional entities to better define their roles and benefits, and to capitalize on network effects in real-world assets and decentralized finance use cases. Platforms that initially start as “digital islands” will evolve into “digital archipelagoes” pooling their liquidity across different blockchains seamlessly connected through various bridges, cross-chain protocols, and ecosystem networks. This will result in a more interconnected global marketplace, encouraging innovation, expansion and access to novel products and services, thereby shaping and redefining industries.
Scaling DeFi solutions will drive technical advances to better manage identity, privacy, data, and governance across the broader ecosystem. This will be fueled by maturing standards and more effective risk management analytics that identify protocol and smart contract dependencies and weak links across blockchain networks. Additionally, a heightened focus on environmental impact and sustainability will drive platforms to adopt scaling protocols that optimize network security, performance, and energy efficiency. These scaling and sustainability advancements will potentially lower the barrier for adoption and catalyze financial inclusion and economic participation across an increasingly growing and diverse set of financial use cases.
Advancements in blockchain-compatible cash will continue to bolster tokenization efforts
Public securities are seeing a significant uptick in tokenization volumes. Tokenized money market funds issued by financial institutions are playing a key role in bridging traditional finance and DeFi, with funds issued by BlackRock, Inc. (Aa3 negative) and Franklin Templeton holding more than 40% combined market share12. One key factor driving the appeal of tokenized money market funds
is the convenience for investors of purchasing and redeeming tokenized funds' shares using stablecoins13. A CFTC subcommittee has recently put forward recommendations14 that endorse the use of these funds as collateral, a practice that is growing within DeFi lending protocols. Moreover, a rising number of stablecoins like Ethena UStb15 are allocating their reserve holdings to encompass tokenized money market funds. This development underscores a deeper integration between traditional financial instruments and blockchain technologies. Tokenized money market funds will likely continue to grow, although potentially at a reduced pace if global monetary policies ease.
Although the use of stablecoins and tokenized money market funds in DeFi has made significant strides, and there has also been momentum behind testing of wholesale CBDCs, which could accelerate tokenization when they emerge, the tokenization of illiquid assets is progressing at a much slower pace. KKR launched16 the Health Care Strategic Growth Fund on Avalanche in 2022 while Hamilton Lane deployed the Senior Credit Opportunities Fund (SCOPE) fund to Ethereum and Polygon, and to Solana in 2024 with Libre17. Despite the potential to tokenize illiquid assets as a means to unlock value, various obstacles to the tokenization of such assets persist. Regulatory hurdles are a key area of difficulty, because financial authorities have yet to provide clear frameworks on how assets can be tokenized and traded across jurisdictions. Legal and tax issues around asset tokenization are also complicating the process,
and the fragmented infrastructure for trading and settling tokenized illiquid assets creates a lack of liquidity and standardization. This fragmentation has hindered the broader adoption of tokenized illiquid assets, even though their value proposition — creating fractional ownership of large, traditionally inaccessible assets — is widely acknowledged.
The digital bond market is on a strong growth trajectory, with 2024 issuances already surpassing those of 2023 by more than
50%. Issuance in the sector continues to be dominated by sovereign and financial institutions. The entry of a few sophisticated corporations such as Hitachi, Ltd. (A3 stable), which has been among the first to issue an A3-rated18 digital green bond, and Siemens Aktiengesellschaft (Aa3 stable), which has successfully completed two issuances, signals a broadening interest and commitment
to digital bond innovations. The issuance of a €100 million bond by Kreditanstalt fuer Wiederaufbau (Aaa stable) on the Polygon blockchain is one recent notable development for digital bonds. In this transaction, compliant with the German Electronic Securities Act (eWpG)19” the registrar assumed several key duties traditionally managed by the Central Security Depository (CSD), marking a significant shift in how digital bonds are administered and setting a precedent for future issuances. A continued growth in upcoming digital bond issuances is likely, supported by recent technological and regulatory progress made, especially in Europe and Asia, as well as the ongoing widespread monetary policy loosening.
Wholesale CBDCs (wCBDCs) are also driving advances in digital bond markets. Switzerland (Aaa stable), as one of the pioneers, initiated pilot programs within the BIS Project Helvetia20, using wCBDCs for settling bond transactions through distributed ledger technologies. Within this project, the IBRD (World Bank) (Aaa stable) issued a seven-year CHF 200 million Aaa-rated21 digital bond settled using a Swiss Franc wCBDC provided by the Swiss National Bank (SNB). The EU recently embarked on a similar exploratory project22 that gathered the participation of more than 30 financial institutions. The European Investment Bank has issued an €100 million three-year digital bond23 with settlement in central bank money through a process involving exploratory cash tokens on Banque de France’s DL3S platform. These pilots show that CBDCs can reduce the costs and inefficiencies associated with traditional bond settlement systems, which often involve multiple intermediaries and delays. As the integration with wCBDCs continues to tighten, we anticipate an increase in the issuance of digital bonds in the coming months.
Stablecoins are becoming more popular as a means to build strong payment infrastructure on cryptocurrency networks, making remittance payments more efficient and simplifying international transactions. In 2023, stablecoins settled more than $2 trillion organic transactions, excluding activity derived from bots or automated trading. The ability of merchants and users to adopt new payment methods has made incumbents more susceptible to fintech challengers. Visa has launched its own tokenization platform, VTAP,25 to help financial institutions issue and manage fiat-backed tokens, such as stablecoins, on blockchain networks. Société Générale-FORGE (SG-FORGE), a subsidiary of Societe Generale (A1/A1 negative, baa2)26 has announced that its Euro-backed stablecoin EURCV will expand27 on the Solana blockchain, well positioned to host a new wave of consumer-centric applications. Japan's leading financial institutions — MUFG Bank Ltd. (A1 stable), SMBC Capital Markets Inc. and Mizuho International plc (A1 stable) — are participating in Project Pax,28 a cross-border payment initiative that seeks to leverage stablecoins as an alternative to traditional correspondent banking systems through an integration with SWIFT. As stablecoins transition from being used primarily for crypto transaction settlements to becoming a general payment tool for consumers and merchants, there is a pressing need for regulatory guidelines that enable their movement across various jurisdictions, which remains an unresolved issue.
Banks are exploring tokenized deposits with a range of potential use cases, from wholesale or interbank use to corporate applications and consumer payments. Tokenized deposits are increasingly emerging as an alternative to stablecoins or CBDCs, thereby preserving the two-tier banking system. Payments made with these bank tokens can be functionally more complex than those made with stablecoins and CBDCs, involving not just the transfer of digital tokens but also a corresponding movement in conventional money. Moreover, countries like Korea29 and Brazil30 are exploring the use of wCBDCs as an asset for interbank settlement. JPMorgan Chase
& Co. (A1 stable) was the first bank to launch a tokenized deposit instrument, called JPM Coin, which now processes more than $2 billion transactions per day31. Banking institutions like Citibank N.A. (Aa3/Aa3 stable, baa1) and DBS Bank Ltd. (Aa1/Aa1 stable, a1) have already launched their platforms32 to support tokenized bank deposits, mainly for interbank transactions. Visa Inc. (Aa3 stable) has announced the creation of a tokenization platform that would support stablecoins and tokenized bank deposits, with Banco Bilbao Vizcaya Argentaria, S.A. (A2 developing/A3 positive, baa2) as its first client. Although pilot programs are yielding positive results, the complexities in both technology and regulation mean that tokenized bank deposits are unlikely to be widely available in the near term.
Institutions will increasingly adopt cryptocurrencies, but are mindful of volatility risk, concentration risk among crypto service providers
The participation of traditional financial institutions in the cryptocurrency market is growing, particularly in their adoption of major cryptocurrencies like Bitcoin and Ethereum, as they expand their crypto offerings. With the recent global rollout of spot ETFs, cryptocurrencies are increasingly considered key components of diversified33 portfolios. BlackRock, Fidelity, and other major financial institutions have filed for or launched Bitcoin and Ethereum spot ETFs, providing institutional investors with direct exposure to cryptocurrencies without the need for self-custody. Spot crypto ETFs represent a building block upon which further products, such as options34 on cryptocurrency ETFs, are being developed.
An increasing number of financial institutions such as Commerzbank AG (A1/A2 positive, baa2)35, DBS Bank Ltd. (Aa1/Aa1 stable, a1)36 and Zuercher Kantonalbank (Aaa stable)37 are diversifying their services to offer cryptocurrency trading and custody to their clients. This move toward embracing cryptocurrencies signals a broader acceptance and institutional validation of digital assets.
Despite this growing institutional adoption, cryptocurrencies continue to be perceived as high-risk assets. Volatility has historically characterized the cryptocurrency market, with sharp movements often triggered by macroeconomic events or regulatory announcements. As such, even though cryptocurrencies are increasingly seen as part of a diversified portfolio, institutional investors are employing strategies such as hedging and diversification within crypto portfolios to mitigate risks. However, cryptocurrencies' underlying volatility remains a key concern.
The expansion of crypto trading and custody services by traditional financial firms has been aided by the development of more robust regulatory frameworks, particularly in regions like the United States (Aaa negative), the European Union (Aaa stable), and Singapore (Aaa stable). The EU's MiCA regulation, which began to take effect in 2024, provides a comprehensive legal framework for crypto assets and their service providers, offering clarity and encouraging institutional participation. In the US, the Securities and Exchange Commission (SEC) continues to evaluate various regulatory approaches, including those related to ETFs and crypto custody, which is providing a pathway for institutions to enter the space with more confidence.
However, risks remain, particularly related to the concentration of cryptocurrency services among a few major providers. For instance, a significant majority of the US Bitcoin spot ETF issuers have chosen the same couple of firms as their custodians, creating a high level of concentration. This situation could lead to systemic risks; disruptions or failures within any of these leading providers might have significant impacts on the entire market.
The continued development of DeFi could partially mitigate concentration risks, but institutional involvement in DeFi remains limited because of security concerns and lack of regulatory clarity. Until a more decentralized or diversified market infrastructure is in place, the institutional adoption of cryptocurrencies will likely be constrained by these risks, even as their role in diversified portfolios becomes more established.
APAC, Europe and the UAE have made significant advances in regulation
Regulation has been advancing globally, with numerous jurisdictions drafting or implementing new rules for the digital assets ecosystem. These regulations focus on three main areas: stablecoins, which constitute a priority for legislators across the globe, cryptoasset services providers, and CBDCs, which remain mostly at experimental stages. On certain topics, such as stablecoins governance or prudential rules for crypto exchanges, jurisdictions are increasingly aligned, and seem to follow the recommendations of standard setting bodies such as the Financial Stability Board (FSB). This increased regulatory clarity, combined with the growing international consistency of supervisory approaches to digital assets, is credit positive for the industry.
In the US, a Republican presidency may lead to a more accommodating stance toward cryptocurrencies. Digital finance market participants anticipate regulatory progress, including the likely appointment of digital-assets friendly regulators. However, any legislative advancements are contingent upon congressional legislation, which will likely require some bipartisan agreement. Although it remains unclear whether the parties could reach a consensus in the short term, some digital assets bills have garnered bipartisan support in past years, particularly on stablecoins and crypto exchanges. After years of regulatory uncertainty, further legislative
and regulatory clarity would be credit positive for the digital finance industry, both for blockchain-native issuers and traditional financial institutions willing to experiment with blockchain technology. In fact, many US banks have been participating in blockchain transactions abroad, such as cross-border payment experiments or digital bonds issuances. With a clear domestic framework to refer to, digital bonds issuances could develop quickly, and turn the US market into a global driver for digital finance.
Hong Kong launched a consultation in early 2024 to draft bespoke rules for fiat-referenced stablecoins (FRS), and proposed a sandbox arrangement to allow issuers to engage with regulators on the matter. The Hong Kong Monetary Authority (HKMA) also established a new licensing regime for virtual assets services providers (VASPs) as of June 2024. HKMA is also pioneering various initiatives related to CBDCs: this year, it launched the second phase of its e-HKD pilot and created “The Community” working group in May 2024 with HSBC Holdings plc (A3 stable, a3), Standard Chartered PLC (A3 positive, baa1) and Microsoft Corporation (Aaa stable) to support the seamless settlement of tokenized assets via wholesale CBDCs.
Singapore finalized a comprehensive framework for stablecoins regulation back in 2023, including a Monetary Authority of Singapore label for single-currency stablecoins (SCS). It is now seeking to update its landmark 2019 Payment Services Act (PSA) relating to digital payment token services (DPTS) through a public consultation that ended on 4 November 2024. Reaffirming its status as a global leader in digital finance innovations, Singapore has introduced a new pilot for asset tokenization under Project Guardian, a collaborative effort between policymakers and the financial industry.
In the EU, the MiCA regulation is reaching the end of its implementation period. Since June 2024, stablecoin issuers in the region have had to comply with MiCA rules, while crypto assets services providers have until the end of the year to be fully compliant. Within the EU, certain jurisdictions have adapted preexisting digital assets frameworks, while others have created new legislation to implement MiCA rules. These differences may result in varying levels of oversight for crypto assets service providers and different levels of consumer protection. The main challenge for European regulators during this transitional period will be to promote supervisory convergence across national competent authorities. Meanwhile, the DLT Pilot Regime, which started in March 2023 and aimed to promote the use of DLT in financial markets, has attracted limited participation from financial institutions and technology firms. High compliance costs and the restricted scope of allowed assets under the pilot regime are likely the main limiting factors. In June 2024, the European Central Bank (ECB) published the first progress report on the Digital Euro project. It has also run trials on a wCBDC from May to November of 2024.
In the United Kingdom (Aa3 stable), digital asset regulation is also progressing. Following the Financial Services and Markets Act 2023 (FSMA), HM Treasury and the Financial Conduct Authority (FCA) are actively working on refining their regulatory approach. Secondary legislation,39 such as amending the UK’s Payment Services Regulations 2017 and the Financial Services and Markets Act 2000, will likely bring fiat-backed stablecoins and other crypto assets and services within the scope of the financial services regulatory perimeter. In addition, the Bank of England and the Treasury have published consultation papers exploring the design and use of a potential digital pound.
The United Arab Emirates (Aa2 stable), specifically Dubai and Abu Dhabi, have also emerged as a hub for digital asset innovation following the launch of the “Digital Assets Oasis,” a policy initiative that combined tax incentives and innovation-friendly legislation. Dubai's VARA has indeed seen a surge in license applications from global crypto firms. The UAE is also deeply involved in the mBridge project, with the Central Bank of the UAE (CBUAE) participating in cross-border CBDC trials to streamline international settlements.
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