Digital tools promise to radically change the global financial market. They are already linked to new forms of money, alternative assets for investment and additional regulatory practices. However, digital tools in finance also create new challenges for investors. What they are and whether they can be prevented was the topic of discussion during the session on cryptocurrencies and digital financial assets at the Financial Security Territory international conference on the protection of finance service customer rights, organized by the Federal Public and State Foundation for Protection of Investors and Shareholders’ Rights and the Eurasian Economic Commission. Artem Genkin, Doctor of Economics, Professor, President of the NPO Center for Protection of Bank Clients and Investors, moderated the session.
Digital wind of change
Digital tools are already radically changing the financial market landscape. Their development has been linked, among other things, to the weakening position of the US dollar. Artem Genkin notes that as of late 2022 and early 2023, according to different estimates, between 47% and 60% of global reserves were stored in US dollars, as opposed to 73% in 2001.
“The Stormgain analytical group estimates that in 2022, the share of the US dollar in global reserves dropped ten times faster than in the previous 20 years,” Artem Genkin adds.
The future of the US currency does not seem unshadowed either.
“According to super optimistic forecasts by The Financial Times, the share of the US dollar in global reserves may fall to 51% within ten years. Russian industrialist Oleg Deripaska predicts 25% ‒ and this is if the US dollar does not default.”
Dismantling the dollar iceberg
Artem Genkin suggests that going forward, we should expect a gradual dismantling of the dollar iceberg, and the process will affect the stock and commodity markets where assets are still traded primarily in US dollars. Digital currencies are already partly neutralizing the dollar overhang that was formed on the global market. Thus, the average annual growth of the US national debt in 2019-2023 was $2.5 trillion, with the volume of the US currency in circulation reaching $2.3 trillion. At the same time, the capitalization of the crypto asset market was $2.9 trillion at its peak in November 2021.
“Stablecoins with alternate basic assets – it can be the dinar, rupee or dirham, kW/h of electricity, or precious metals – will be developing actively. This role will no longer be exclusive to the fiat dollar,” the expert notes.
In the meantime, central bank digital currencies (CBDC) are being actively introduced. Over 30 countries, a huge share of the world population, have them at the proof-of-concept stage, implementation or testing. China is the leader: as of June 2023, over 950 million transactions were made using the digital yuan; over 12 million digital wallets have been opened in the country.
Dangers of digital tools
Digital tools often bear serious risks for investors. For instance, if we speak about such funding mechanism as ICO, only 8 major projects out of 18 maintained their relevance in 2018-2019 in Russia, says Marat Safiulin, manager of the Federal Public and State Foundation for Protection of Investors and Shareholders’ Rights. Some projects sank into oblivion; the performance of others fell critically.
“Naturally, it’s not a Ponzi scheme, but it is still a quite dangerous market,” Marat Safiulin says.
The expert noted that the distinctive feature of pseudo-investment projects is their active promotion that does not say much about the product. The owners of tokens are encouraged to keep them on their accounts for as long as possible.
“The retail investor’s irrational decisions are often based on FOMO, the fear of missing out. This behavior is distinctive for all markets, but crypto projects can simply be fake,” Marat Safiulin notes.
Digital tools promise to provide new opportunities for the participants in the financial market. For instance, digital financial assets provide issuers a speedier issuance of digital rights, flexible liability planning, as well as the automatization of compliance with digital financial asset requirements and the inalterability of transaction records, says Kristina Aleshina, head of the Directorate for Oversight of Platform Operators and Information Services, Department of Financial Market Infrastructure, Bank of Russia.
It explains to a great extent the explosive growth of the digital financial asset market in Russia, which has reached 40 billion rubles.
“A total of 197 digital financial assets have been issued since the 2nd quarter of 2022, and 64 of those have been redeemed. With the average repayment period of 2 years, the average profitability stood at 17% as of this year’s third quarter,” Kristina Aleshina notes.
Planned features can differ to a great extent. For instance, DFAs can comprise financial products that are unprofitable when used as traditional instruments, as well as low liquidity and inaccessible assets. DFAs are issued to solve internal corporate problems as well.
“We see a new emerging market, an extremely promising one. It has been estimated that it may reach RUR300-350 billion next year,” Artem Genkin says.
The DFA market will actively expand, according to Yaroslav Kabakov, Director of Strategy, Finam Investment Company. In this regard, educational activity is essential, serving to protect private investors from potential risks associated with the use of new financial tools. It is no accident the existing regulations already include a multi-stage system for allowing non-qualified investors to enter the DFA market, Kristina Aleshina notes.
“This is an emerging market, and a decision was initially made for investors, particularly non-qualified ones, to become familiar with such process as asset tokenization, with a certain risk limitation,” the expert emphasizes.
She added that the decision to issue DFA is published both on the operator and the issuer’s websites, and includes information on beneficiaries, terms of issue, redemption and rate of return for investors to check.
Rating systems could eliminate the risks associated with investing in digital assets. However, as regards creditworthiness, ratings can be assigned solely to DFAs linked to debt instruments, says Pavel Samiev, General Director, BusinessDrom Analytical Agency. Otherwise, a credit rating can hardly be provided.
Yet, DFA ratings have a promising future, as demonstrated by the demand for rankings of traditional financial instruments, such as bonds.
“This is a strong base for investors, including private ones. It would be improper to force them to use ratings – but if those appear, they will be useful,” Pavel Samiev notes.
“Russia’s DFA market essentially needs ratings and various rankings, as well as a ‘white list’ of issuers, mostly for private investors to navigate this market,” Artem Genkin concludes.