Ethereum is becoming the leading blockchain for tokenizing real assets.

Digital financial technologies have enormous potential for transformation. Distributed Ledger Technology (DLT) - blockchain being the best-known example - enables digital bond issuances, which over time could reduce the need for intermediaries in the issuance process, thereby improving operational efficiency and possibly reducing costs. DLT also underpins the tokenization of real assets, which could increase the availability of certain instruments.

But to turn these potential benefits into reality and achieve widespread adoption, according to Moody'\''s, DLT-based technologies and platforms must overcome several key hurdles, including a lack of interoperability and'''standardization between DLT systems, lack of reliable digital cash options, regulatory uncertainty and technical risks.

Working with an authorized blockchain

In the past few months, more institutions have begun working with permissioned blockchain through pilot studies and real-world transactions. Many of these organizations are leaning towards Ethereum, due to its vast ecosystem of applications and networks that have developed its user base and product offering over the past few years. As an open, shared blockchain, Ethereum provides the underlying blockchain layer on which developers can build solutions for exchanging data and value across other networks.

Tokenization''assets

The flexible design of Ethereum and its multi-year modernization plan, including improved interoperability, have made it a popular platform for digital bond issuances. Large organizations such as the European Investment Bank have issued bonds on Ethereum, which was also the underlying blockchain for Moody'\''s 2023 Moody's rated digital green bond, the €10 million Société Générale bond. Over time, Moody's believes public blockchain networks, such as Ethereum, and traditional infrastructure will become more interconnected, fueling increased blockchain use and industry growth.

The problem of digital money

Asset Tokenization - the transformation of assets such as funds, real estate or''art, into digital tokens using DLT - is gaining momentum. The total value of tokenized real assets on public blockchains has grown from $1 billion to $2 billion over the past year, and most of these assets are currently held on Ethereum.

Stablecoins are cryptocurrencies whose price is tied to a specific asset, such as fiat currency. However, in a constrained market, stablecoins do not always retain their peg. Nevertheless, two other forms of digital cash that can address the current vulnerabilities of stablecoins are''tokenized bank deposits and central bank digital currencies (CBDCs). According to Moody'\''s, the development of tokenized bank deposits and CBDCs will continue into 2024, although their interaction with public blockchains is not yet clear.

Regulatory development

Legal clarity is also expected to improve in 2024, according to Moody'\''s, as regulatory frameworks are developed to support new digital assets and services, although not all regions are moving at the same speed. Regions including the EU, Singapore and the UAE may attract new investors as a result of new customer and investor protections and new licensing regimes for digital assets. On the other hand, the US is likely to continue to use regulatory measures to establish''legal precedents in the digital asset market, as developing a framework for digital assets in the US remains a more distant goal.