By Hirander Misra, Chairman & CEO of GMEX Group
At the start of January 2021, I made my top 5 predictions for the digital, crypto and blockchain space. The results were very accurate. I briefly recap those and try to repeat that feat with my key predictions for 2022:
2021 Predictions recap
Capital markets accelerate the move from analogue to digital – Regulated digital exchanges and custodians continued to be launched, not just from newer players but also from traditional ones.
Product innovation in terms of assets tokenized begins to succeed – Security tokens, whilst still nascent, started to come into their own during 2021 as better products were developed with listing and trading on digital exchanges in regulated environments.
Demand for smart and digital hub solutions increases – digital hub-based models, which can connect many participants from upstream to downstream launched and started to gain traction, with the aim of bridging the gap between existing traditional infrastructure and fragmented multiple blockchain-enabled digital infrastructure.
Convergence of B2C and B2B with digital exchanges and payments intersecting – Emerging markets opportunities began to propagate, harnessing users and aggregating and matching these with institutional activity, including a well-designed compliance construct to ensure proper KYC/ AML.
Growth of CBDC and payments use cases going live – We saw successful pilots in some developed markets and some emerging markets starting pilots to embrace a CBDC and payments-enabled ecosystem.
Looking ahead to 2022
Regulated DeFi is applied in practice
Currently many ventures embracing blockchain technology are doing so by utilising a traditional centralized model. In contrast, the decentralized exchanges and broader DeFi plays, whilst increasing their liquidity flow, currently have perceived KYC/ AML concerns.
Financial Action Task Force (FATF) guidelines suggest that Decentralized Applications (DApps) will need to comply with country-specific laws enforcing FATF, AML, and Counter-Terrorism Financing requirements.
These guidelines call for countries to identify individuals with “control or sufficient influence” over DeFi initiatives, which could potentially result in founders of such initiatives becoming subject to rules requiring them to provide beneficiary information relating to transactions.
This will lead to ‘Regulated DeFi’ in practice, which is seen as essential for DeFi to become more usable for institutions.
On a related note, Central Bank Digital Currency (CBDC) adoption will continue to rise, coupled with some form of regulation for stablecoin usage, likely – starting with the United States. This will aid in the reduction of Fiat payments friction and inefficiency, which is a good thing as traceability and credibility will protect consumers and make it cheaper and faster to transact. It will also create an environment whereby more participants transfer from being off-chain to on-chain, creating more democratisation and financial inclusion despite decentralized purists say about central authorities.
CeFi and DeFi convergence leads to HyFi
Centralized Finance (CeFi) and Decentralized Finance (DeFi) will intersect within a regulated environment to support the convergence of traditional and digital asset activity.
Centralized and decentralized technology-enabled businesses will coexist via hybrid solutions (traditional and digital) as buy-side institutions, banks, brokers, exchanges and other capital players increasingly adopt digital assets as part of a digital transformation agenda.
To support this, financial market and digital asset infrastructure will become interoperable. One such example will be centralized and decentralized exchanges combining to create a type of Hybrid Exchange (HEX). For example one which supports trading models that are Centralized Exchange (CEX) like and Decentralized Exchange like (DEX) in a cohesive fashion.
These will be part of the evolution of hybrid digital market infrastructure delivering Hybrid Finance – HyFi!
Digital Market infrastructure interoperability solutions gain increased traction
Digital asset interoperability and time to market remain a challenge, with traditional and multiple types of blockchain-enabled digital asset infrastructure being severely fragmented.
We will increasingly see the evolution of solutions and services that bridge the gap between traditional and digital capital markets, whilst effectively mapping to evolving regulatory frameworks to enable mass adoption by institutional players.
Institutional players largely want exposure to digital assets in the same way as they do other asset classes. Ease of integration into what they already do is essential.
In order to surmount these obstacles and achieve greater efficiency in digital asset facilitation, financial players need to optimise digital asset infrastructure.
To address this need in a secure and scalable fashion, platforms offering cloud enabled microservices, by way of a distributed hub model that integrates private ledgers and public blockchains into traditional market infrastructure, will expand and prosper. This will facilitate better portability of digital assets as well as enable seamless trading, clearing and settlement.
Traditional exchanges and post trade operators will harness such solutions to digitally transform themselves, as they seek both technology and knowledge enhancing partnerships. They will no longer be able to ignore the keen interest in digital asset trading from both retail and institutional investors or the need to service the market with trusted digital asset infrastructure.
NFTs, legal and finance intersect
The growth of Non Fungible Tokens (NFTs) will continue in multiple spheres including sport, film, music, gaming, art, other collectibles, and virtual assets in relation to the Metaverse.
There will be innovation in legal and smart contract frameworks addressing some of the NFT ambiguities pertaining to intellectual property (IP), ownership and licensing rights. This will be a welcome development to legitimise the sector and instil trust, which in turn will propel the sector to more accelerated growth.
Such growth will also be aided by the intersection of NFTs and finance. We are going to see portfolios of NFTs created to offer structured products and portfolio diversity to Family Offices for example, in addition to the fractional ownership opportunities afforded to retail investors. On the other hand, the ability to tokenize such structured products and NFT funds, and the creation of digital bonds to finance NFT projects which list and trade on digital asset exchanges open to both crypto and fiat investors, will serve to inject further capital into the sector.
Data, Analytics and AI combine with blockchain
The convergence of data, analytics and AI with blockchain will begin to drive smarter solutions in 2022. For example, Netflix knows exactly what content you are watching and can therefore purchase more content and finance the creation of new content by predicting anticipated demand with a high degree of accuracy. They can also accurately assess content supply and demand dynamics on platforms elsewhere and utilise this to address any gaps and opportunities in terms of their own content offering. Amazon works on similar principles.
Imagine if such technology was transferred from B2C use and applied to B2B finance for product development and ongoing management. Well, this is not a utopian world in a Science Fiction movie, it will soon be coming to a financial centre near you via the cloud. When combined with AI-driven smart contracts and blockchain immutability, we are going to see an explosion of digital asset and traditional asset product innovation suited to the needs of both retail and wholesale user segments.
The question also arises whether the Big Tech central construct gives way to a more democratised decentralized version. As I have stated in earlier predictions, both will continue to coexist for the foreseeable future and certainly for all of 2022.
We are certainly in store for an exciting digital ride this year. Buckle up and have a great 2022 and make the reality virtual and the virtual reality!
Hirander Misra is the Chairman and CEO of GMEX Group (GMEX), offering innovative solutions for the creation & operation of electronic exchanges and post trade infrastructure in securities, FX, derivatives, commodities, crypto & digital tokenised assets. He is also part of the Mauritius Financial Services Commission task force on Digital Finance.