2023 has seen the world’s financial institutions take steps toward creating an enduring digital economy. Continued global investment in digital assets technology, improved interoperability (via public and private partnerships and smart frameworks), and a growing appetite for tokenization have set the sector up well for further innovation in 2024.

Against this backdrop, there are three trends that we expect will shape global finance in the year ahead.

Global digital asset and currencies innovation

Most of the world’s markets faced economic headwinds over the past 12 months. Despite this, several regions made considerable contributions to ushering in the future digital economy. The Gulf region, for example, saw several important government initiatives focused on digital assets and currencies.

In March 2023, the Central Bank of UAE launched the CBDC Implementation Strategy, aimed at carrying out a range of domestic and cross-border CBDC use cases. In October, the Qatar Financial Centre launched a Digital Asset Lab that enables commercial banks and fintechs to experiment with DLT. Abu Dhabi also recently announced a comprehensive DLT Foundations and Decentralised Autonomous Organisations (DAOs) framework. Smart parameters like this will be crucial in providing tech firms with the legal certainty they need to set up and invest in the region. They will also provide some much-needed standardization across the different ecosystems.

To that end, the UK recently announced a Memorandum of Understanding (MoU) with the UAE, aimed at promoting collaboration across financial services and capital markets. Dedicated action toward setting global standards for emerging technologies like DLT will be crucial in the coming year and beyond to leverage the technology’s full potential.

Interoperability as a catalyst

The emergence of more firms deploying blockchain across all regions is one of the many factors driving the need for interoperability. Recently called one of the "most significant obstacles" to enabling a thriving digital economy by the EU Commission, interoperability has the potential to catalyze digital assets and currencies adoption.

Interoperability can connect the pieces between various DLTs and tokenization use cases and in doing so ensure seamless asset exchange, and reduced time and costs across financial transactions and settlement. Allowing diverse ecosystems to connect helps overcome the siloed infrastructures that today’s regulated markets rely on and encourages innovation, avoiding vendor lock-in.

Platforms that prioritize interoperability, working within a regulatory environment, have a greater chance at success. Those that remain isolated, relying on a single technology, will continue to face adoption roadblocks. As we head into 2024, we’re likely to see renewed investment in building a digital economy upon an interconnected ecosystem of multiple DLT platforms.

Tokenization and the importance of smart frameworks

Prioritizing interoperability and achieving standardization will be crucial in driving broad adoption of tokenization. Already a key trend in capital markets in 2023, tokenization is driving innovation in how traditional financial assets are created, traded, and managed.

It has a demonstrable ability to democratize access to financial markets, improve cost efficiency, and enhance collateral mobility. In the past 12 months, HSBC tokenized ownership of the physical gold in its London vault, and Euroclear settled its first digital bond using its new Digital Financial Market Infrastructure (D-FMI). These are real-world examples of the impact tokenization is having on traditional financial infrastructure, not just sandboxes, or proof-of-concept exercises.

DLT could help tokenize an estimated $5 trillion in assets over the next five years. However, this will be dependent on whether the correct frameworks and standards are in place for adoption and scale. Regulators are constantly trying to keep up with technological innovation, but there will always be roadblocks. Although there is an understanding of the technical protocols that must be in place to allow for digital assets' potential, industry standardization remains incomplete.

For example, the banking industry faces roadblocks when it comes to tokenized deposits and public chains, though the technology has already proven its real-world use cases. As more capital markets leaders turn to DLT, collaboration between governments, FMIs, regulators, and technology providers will be imperative.

The UK’s Financial Conduct Authority (FCA), the Monetary Authority of Singapore (MAS), the Financial Services Agency of Japan (FSA), and the Swiss Financial Market Supervisory Authority (FINMA)’s recently announced partnership on digital asset innovation is an encouraging step in the right direction.

Working together and leveraging combined market and technological expertise will help us reach the ultimate end goal - empowering market participants to control their assets securely, seamlessly, and in a streamlined way across different networks. Technology from CBDCs to tokenized deposits and regulated digital assets will have a profound impact on the future financial landscape. The transition won’t happen overnight, but we’re well underway and set to accelerate in 2024.