Crypto assets and tokenization will increasingly disrupt the financial markets, says S&PGlobal Ratings in its report – Global Credit Outlook 2022: Aftershocks, Future Shocks and Transitions. It says that growing interest from institutional investors augurs accelerated expansion for cryptocurrencies as investment vehicles.
S&P Global Ratings highlights that fast adoption, expanding use cases and evolving technology are factors driving further digitalization of markets. The report stated that cryptocurrencies created the framework. And tokenization is expanding the use cases and opportunities for further digitalization.
It sees cryptocurrencies experiencing major swings in 2022. The global rating agency attributes this to the crypto assets’ extreme volatility, regulatory uncertainty and high energy consumption. With foundations being laid by cryptocurrencies, S&P Global says greater disruption of financial markets will come from tokenization. It describes tokens as digital representations of a physical or non-physical asset. The tokens are managed on distributed ledgers. It represents the right to the asset.
In regards to central bank digital currencies, the ratings agency said CBDC are likely to play the role of a bridge. It expects central banks across the world to launch digital versions of their fiat currencies. S&P Global believes this could bring about further adoption of crypto assets and tokenization. It will offer a smooth and reconcilable link between the traditional and virtual worlds.
The report says segregation of assets could enhance liquidity. It could be an opportunity for investors or borrowers. It should be noted that tokenization allows for an efficient exchange of assets. It reduces the need for intermediaries. Moreover, the report says this could allow for markets to open 24/7, shorten clearing and settlement times. It could ultimately reduce counterparty risk and free up collateral.
In regards to regulation, the S&P Global report points out the need for a regulatory framework to recognize the rights of token holders. It says the technology itself has to meet the requirements of network stability, scalability and settlement finality. The ratings agency believes the technology also be immune to cyber risk.