The Toughest Challenges for Digital Assets Lie Ahead, Not In the Rear-View Mirror

It’s a great honor to have our partner, John Peng, as one of the speakers at the 11th Annual Global Blockchain Congress in Dubai on Mar 6th!

While 2022 was very tough, the digital asset market still faces many robust challenges. From ESG concerns, to regulation, and the “stability” of stable coins, many questions remain to be answered.

John shared his view on the two toughest challenges that digital assets face in order to be adopted by the mainstream:

1.   Current token issuance is not stable. Token price drops and market downturns are likely to cause a bank run. The demise of Terra/Luna is due to UST holders fearing a peg break and selling their UST. This increases the supply of UST and drops its price even further. Luna was supposed to support UST but people also lost faith in the entire ecosystem and were dumping Luna as well.

The same situation happened to U.S. banks in the past. The succession of bank runs that occurred in the early 1930s represented a domino effect of sorts, as news of one bank failure spooked customers of nearby banks, prompting them to withdraw their money, where a single bank failure in Nashville led to a host of bank runs across the Southeast. In response to the bank runs of the 1930s, the U.S. government set up several regulatory mechanisms to prevent this from happening again, including establishing the Federal Deposit Insurance Corporation (FDIC), which today insures depositors up to $250,000 per banking institution. When people know the government insures their deposits, their fear subsides. This has been the case since the U.S. established the FDIC. In terms of token issuance, people will have more faith in tokens with a “reserve bank” and are likely to prevent the bank run. Therefore, the efficient way to stop a bank run on tokens/ stablecoins is to have a “reserve bank” (given the current small asset size of crypto, the “reserve bank” could be major banks such as JP Morgan Chase, Citi, etc. and top insurance companies such as AXA, Prudential, etc.) providing liquidity to token issuers. However, without a global legal framework, major banks and insurance companies cannot be the “reserve bank” to token issuers.

2.   Blockchain technology still needs to be more efficient to be adopted in the transaction banking space (one of the most profitable segments in banks). While Visa can process up to 24,000 transactions per second (tps), Bitcoin can only process seven tps, and Ethereum can handle 20 tps. Cryptocurrencies must catch up with VISA’s capability to achieve mass adoption. The common saying that “Bitcoin is not scalable” is mainly focused on its throughput, i.e. it can only handle seven transactions per second (tps) which is not enough for real-life usage (when compared to VISA). The finality speed is also another issue as people won’t wait for 60 minutes to confirm that a purchase of a coffee is valid.

This could be verified by Netflix’s story. Netflix has been a big winner with the advancement of digital technologies. To date, they have amassed an astounding 231 million international subscribers in nearly 200 countries around the world. This success has come from primarily two reasons: 1) advancements in streaming capabilities accelerated in line with Cable TV; 2) the proliferation of mobile phones and tablets and the introduction of smart televisions allowed Netflix to be always available to its customers.

With the advancement of computing power, blockchain technology will eventually match the mainstream standard and will be adopted by transaction banking services.

Thanks again to The Global Blockchain Congress for bringing us together to discuss the future of Web 3!

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