The Next Big Thing in Capital Markets

For years, certain areas of the financial markets have been encumbered by excessive limitations, resulting in inefficiencies in capital allocation. This is poised to change with the forthcoming widespread use of digital assets. This article provides an overview of digital assets, as well as some of the potential and problems that they present for individual investors, institutional investors, and financial service providers.

Limitations on asset class availability, the complexity of cross-border transfers, and minimum capital requirements, to mention a few, have long hampered legacy markets. Given the possibilities and universal applicability of digital assets, all market players will benefit from at least getting aware with the issue, if not devising a plan for tomorrow’s capital markets.

Introduction

“Digital Assets,” like “Blockchain,” is a jargon that is often used inappropriately. Nonetheless, understanding the consequences of digital assets is critical since they will likely play a significant role in the future. It all started with Bitcoin and the technology that underpins it, which allows for the creation and transfer of digital wealth without the use of intermediaries. Ethereum, an asset management platform, was introduced a few years later. Since then, Ethereum has grown to become the world’s largest blockchain ecosystem. In recent years, the German federal government, in collaboration with the federal ministry of finance and the BaFin (Federal Financial Supervisory Authority), has enacted a number of legislation and regulations aimed at laying a sound framework for digital assets.

One of these rules lays forth how institutions must store digital assets in their possession. In addition, the legislation governing electronic securities was enacted, as was the fund placement act. While Germany is not exactly at the front of the pack, with smaller nations like Switzerland being even more nimble and forward-thinking, the German government is making progress in laying a sound regulatory basis for tomorrow’s capital markets. This is especially noteworthy given Germany’s previous challenges with digitization: the sluggish digitalization of schools and colleges, as well as the chaos of paperwork in vaccination facilities, to name a few instances.

Digital Assets: Use Cases

But what are digital assets, exactly? Computer assets are, at their heart, digital representations of various items and their associated value. They make it possible to issue and transfer ownership without the need of paper papers. Even today, whether you buy stocks through a broker, or an internet bank situated in Germany, a paper document with a notary stamp is kept for you somewhere on German territory in a safe. This inefficient method of completing such deals has been around for a long time. Traditional securities, for example, take time and money to issue, and cross-border exchanges are often quite cumbersome. These inefficiencies result in excessive costs and delays since transactions cannot be completed or finished in a timely manner.

Widespread use of digital assets will result in easier and faster issuing of new securities, as well as expedited cross-border transactions. These advantages apply to already available assets such as bonds, fund shares, and, in a few years, stocks. Digital assets will enable the creation of whole new forms of securities, in addition to enhancing the efficiency of current securities.

Some instances are as follows: German entrepreneurs have begun developing digital assets based on real estate. Retail investors who would otherwise be unable to engage in the real estate market owing to a lack of funds may now do so thanks to companies like Finexity and Exporo.

Digital assets allow investors to invest in real estate with as little as 5,000 EUR. Investors can also split their money amongst multiple distinct things, allowing them to diversify their portfolio. One disadvantage of this strategy is that it might be construed as a debt capital investment. Market investors who are concerned about inflation, which is now around 3.8 percent in Germany and almost 5% in the United States, may be justified in their skepticism of debt capital investments. When equity instruments are created, they will alleviate these problems.

In the fall of this year, corporations are anticipated to release such securities, which will provide investors with good inflation protection. Other businesses are working on selling investable shares of Oldtimers, art, and other real assets, and digitized real estate is simply the first step. They can be used not just as debt capital investments, but also as inflation-resistant equity securities.

As a result, digital assets are enabling and accessible to new investment categories, even for individual investors. Aside from stocks, which are small chunks of larger bundles of assets that represent firms, digital assets will allow for targeted, inflation-resistant investments in individual real estate holdings. This usage of digital assets, which is now centered on real estate, antiques, and art, will be extended to industrial items starting in 2022, making them available to investors.

Industry 4.0 Financing

The principle of leasing is well-known, but who can profit from the profits created by thousands of leased automobiles besides institutional investors and car manufacturers? Nobody at the moment. Industrial plants, machinery, tractors, and other industrial products will be available to individual investors starting in 2022. This works because these assets are usually coupled with a high up-front cost and continual resource usage – an operational cost.

At the same time, they produce a product that generates profit. Simply put, this creates an investment opportunity for ordinary investors, similar to how leasing works. Industrial equipment manufacturers will be free to continue producing their products without being constrained by capital constraints.

The future is digital assets. In the future years, there will be a major growth in the variety of investable asset kinds. Businesses in the financial sector, as well as those in other industries, should familiarize themselves with the new prospects presented by this next stage of digitization. There are some projects and prototypes available now, but in a few years, thousands of digital assets will be open to everybody.

Conclusion

The financial industry should not be complacent about future changes; instead, it should embrace the difficulties and possibilities of the coming digital transition and start planning forward. Cryptocurrency exchange competition is increasing rapidly, and as Coinbase has demonstrated, they have the requisite assets in their war chests to build and swiftly implement effective business models.

Furthermore, these platforms are quick to extend the materials available to their clients. As more traditional assets get digitized, these platforms will begin to offer digital equities, tokenized real estate, art, and other services to its customers in addition to cryptocurrency. Institutional and ordinary investors will likely utilize whatever platform provides the most services and assets. To avoid losing relevance, legacy financial service providers will need to adapt to this new world of digital assets.