Cover Story: Why digital assets are key for the financial sector

American writer Alvin Toffler once said – “The great growling engine of change is technology.”

A spate of significant technological advancements has occurred over the past decade, with many of these developments becoming ingrained in our daily lives. Among these is fintech, which has had a major impact on the global financial services industry. According to Allied Market Research, the global fintech market was valued at $110.57bn in 2020 and is projected to reach $698.48bn by 2030, at a compound annual growth rate of 20.3 per cent.

Meanwhile, the Middle East region has witnessed an influx of fintech startups, and increased funding and rising support for existing and new financial technology ventures. The number of fintech companies is expected to reach 465 in the region this year from 30 in 2017, according to Statista, a research and analysis company.

“We have seen tremendous growth in fintech over the past several years. Fintech is making banking and financial services more streamlined and accessible. Through technology, users can take advantage of automation to speed up processes that previously a human would have managed. Moreover, the Covid-19 pandemic has highlighted the areas within the sector that needed further attention and improvement to make them more resilient,” says serial entrepreneur, German investment banker and head of FTX MENA, Mohammad Hans Dastmaltchi.

Bahama-based cryptocurrency exchange firm FTX offers products, such as industry-first derivatives, volatility products and leveraged tokens. The company recently received an official licence to operate in Dubai, following which it will commence offering regulated crypto derivatives products and trading services to institutional investors in the emirate. It also plans to operate a non-fungible token marketplace.

Digital assets – The next frontier
Digital assets are poised to be an integral component of the financial sector. From cryptocurrencies to traditional investment assets being tokenised, there are increasingly more digital assets throughout the financial ecosystem. The Middle East has always exhibited a progressive business-first mindset to cross-sector development, emerging as a global economic powerhouse. Each region and country have its unique set of advantages and circumstances, but the Middle East, Africa and South Asia has been on a growth trajectory, believes Dastmaltchi.

Navigating through challenges
However, Dastmaltchi believes that keeping up with the ever-changing technological landscape while maintaining customer loyalty is a major challenge. The traditional financial sector is at an inflection point with new entrants and innovative technology taking centre stage. Despite players recalibrating their products and revamping legacy systems to keep up with evolving times, even the fastest of adopters are facing challenges that come with a rapidly changing landscape.

“Retroactively adopting tech solutions is no small feat for the world’s oldest and largest banks. Progress is expensive, slow, and inconsistent with what customers want. Smaller, more agile newcomers – like online-only banks that have challenged longstanding financial institutions in recent years – have a competitive advantage in that they’re exactly where the customers want them to be. These newcomers are available 24/7 with flexible banking through slick smartphone apps, which has driven customers to expect a fast and easy app experience complemented with full access to support services. In addition, they want to be able to use their devices as digital wallets, make instant transfers, and even manage their crypto wallets and stocks in the same place.”

Meanwhile, he also points out another key challenge ­– security. “Financial services deal with large amounts of sensitive data. Therefore, the latest tech-based security measures are essential to keep customers’ accounts as secure as possible. Any breaches have the potential to be disastrous for the financial institutions as well as its customers.”

For digital assets, he observes that the increasing prevalence and importance of it have necessitated the development of new offerings to meet changing needs. “There are opportunities for new service providers to step into the arena, delivering solutions for every aspect of the digital asset spectrum – from management to security and beyond. However, he adds that as with any rapidly growing technology sector, there is a need to build strong security solutions that protect both consumer and investor data. “There is also a need to introduce governance and regulations. Blockchain contributes towards this.” Dastmaltchi adds, “There is a lot of positive movement in the sector now, but we need to start seeing more universal standards, governance and regulations that will monitor and ensure the integrity of the entire digital financial sector. This will create a safer and more robust environment for consumers, investors, and financial entities alike.”

Mitigation of risk
Despite the fact that the market capitalisation of cryptocurrencies has plummeted, the risk associated with banks, enterprises, tokenised businesses, digital asset exchanges, crypto natives, traditional financial services, and other companies approaching or investing in digital assets is still being debated. So, what justifies investing in digital assets? Furthermore, what security measures will safeguard an investor’s money, given that these operate online?

It is believed that when these currencies become more widely accepted and more people start trading in or using them, they will become more stable, much like stock markets. As cryptocurrency operates on blockchain technology based on the idea of a digital distributed ledger [meaning anyone can see any transaction at any time from anywhere], every transaction is stored in the form of data on the blockchain, and nobody can fiddle with it.

“Digital assets can lower the risks associated with traditional assets, especially if they are protected within a strong framework of security measures, governance, and regulations. With blockchain, cutting-edge security tech and authentication systems, it’s possible to limit security risks. Traceability of all digital assets’ interactions helps protect against theft and other undesirable actions. It’s also possible to trademark digital assets, particularly creative content, providing additional protection. Back-ups are easier to achieve with digital assets, as opposed to trying to replicate traditional assets,” explains Dastmaltchi.

And although a few elements contribute to the volatility of crypto prices, Dastmaltchi notes that any new concept takes time before mass adoption occurs. The crypto space has gained global prominence, but cryptocurrencies, for the most part, are still in the initial stages. “As the market matures, we will see less volatility as trading decisions become less sentimental and more based on the understanding of what influences the fluctuation in price.” However, he says that the biggest barrier keeping people out could be viewed in two ways. “At the retail level, it’s the newness and the complexity of the end-to-end process, while at an institutional level, I would say it’s the development of clear laws and regulations.”

Spearing ahead
Moving forward, it is likely that in the future, digital assets will be regarded on par with physical assets. As a result, many regional organisations have started accepting digital currencies as a mode of payment. This trend will only grow in the next decade when digital assets will become the mainstream currency. “We think digital assets will continue to mature as an asset class, especially as we see the type of comprehensive regulatory framework that we have in Dubai and in other jurisdictions around the globe.”

Players such as FTX are on a mission to grow the digital asset industry in countries and jurisdictions with a robust digital asset framework. “The world has seen Dubai be the first to reopen and spearhead regional recovery more decisively in the last 24 months. We believe this will continue as the market adapts to more progressive initiatives, and the dynamic approach taken in regulating virtual assets is a testament to that,” he concludes.