State Street DigitalSM

Digital Digest: Separating Fact from Fiction

Five things to know about the digital transformation of finance

May 2022

1. How Safe an Asset Is Crypto?

In a new analysis, Michael Metcalfe, global head of Macro Strategy, State Street Global Markets, compares how bitcoin has fared relative to traditional safe havens in the past three turbulent years. The early evidence suggests bitcoin has held up reasonably well. It has outperformed traditional safe haven assets on a risk adjusted basis. But that performance has been based on abundant liquidity. He then explores what may be bitcoin's greatest challenge yet, the withdrawal of global liquidity that has sent global financial markets reeling.

2. An ESG Assessment of Crypto

According to a new assessment by our global head of ESG, Rick Lacaille, crypto has an ESG problem. Both the negative environmental and governance impacts of crypto go a long way to cancel out potential positives from increasing financial inclusion. However, that may not always be the case. The industry recognizes it has an environmental problem and has options for reducing its carbon footprint. At the same time, governments are accelerating efforts to provide regulatory and oversight frameworks that foster trust and reduce risk in the financial system. Over the long term, widespread adoption of cryptocurrencies will likely depend on how well ESG considerations are addressed.

3. The Developing Global Regulatory Landscape for Digital Assets

According to Justin McCormack, head of Legal at State Street DigitalSM, 2022 may well be the year of digital finance regulation. Regulatory authorities across all major regions—the United States, Europe and Asia—have taken concrete steps in the first quarter of 2022 to bring regulatory clarity to facilitate responsible growth of the market and further developments are expected. For example, President Joe Biden, has ordered a wide range of federal agencies to produce at least 17 reports on topics related to Central Bank-Sponsored Digital Currency (CBDC), consumer protection, illicit activities and international cooperation, with most due in September. The European Union’s market in crypto assets regulation entered its final phase of negotiations in March and approval is expected later this year. In Hong Kong, regulatory guidance is expected soon after regulators requested comments on a recent paper.

4. Crypto Is Just the Start of the Digital Transformation

The conversation around the adoption of blockchain technology in financial markets has, for the most part, been centered around cryptocurrency and its rise as an asset class. While crypto is an important development, it is just the start. Blockchain technology can support the digitization of any financial asset. State Street Digital’s head of North America, Jay Biancamano, explains how blockchain will change what we invest in, how we invest, and even who we invest with.

5. The Digitization of Money

One of the most pressing projects on the agenda of central banks is a study of the feasibility of a CBDC. A 2020 survey found that 80 percent of central banks are engaged in investigating CBDCs, with several having progressed beyond research to conducting pilots. It is likely that a general-purpose CBDC will exist within three years. In this article, State Street’s senior investment advisor, Ramu Thiagarajan and our head of Digital Custody, Swen Werner, explain everything you need to understand about CBDC and what is coming.

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