An ecosystem for digital assets is a network of services and tools for handling and investing in digital assets. Traditional asset owners, asset managers, and service providers must work together on asset management and acquisition. Traditional financial service providers and the economic infrastructure they rely on are also part of this system. The combined efforts of these businesses result in a more stable and streamlined solution than any of them could provide alone.
As the digital asset ecosystem expands, so make the threats it poses to the financial system's stability. Regulators must evaluate the potential impact of these assets as they become more interconnected and begin providing significant financial services outside the ecosystem. Some of the possible flaws in the digital asset ecosystem have been brought to light in a recent staff report by the Federal Reserve Bank of New York. Many of these flaws are indeed shared with the established banking system, but many new dangers are plaguing the developing financial technology industry.
The absence of regulatory control is a significant issue in the crypto-asset ecosystem. While some authorities have voiced concerns about this, there must be more considerable agreement on regulating the industry. According to the FSOC report, cryptocurrency regulation needs to be updated and strengthened to ensure the asset class's stability. Such as the necessity for financial authorities to standardize cryptocurrency regulation to promote a fair playing field and safeguard customers.
The need for regulators to monitor the expanding threats in the crypto asset ecosystem is another major issue. Authorities in charge of regulating the digital asset ecosystem should adopt rigorous risk management standards and implement adaptable regulatory frameworks. Exchanges, wallets, and financial institutions are all high-risk zones that need immediate attention from regulators.
There is a high degree of interdependence between digital assets, and integration is essential for digital asset maturity. Traditional asset owners, suppliers of financial infrastructure and services, and fintech companies all have a role to play in bringing digital assets to the next level of development and maturity. These systems' vital components are the Digital Asset Platform (DAP).
To be valid, digital assets must mesh with conventional currency and foreign exchange markets. For instance, they should be compatible with foreign payment systems. The financial services sector is well-placed to aid in the creation of new industry standards. Regarding international money transfers, SWIFT has been instrumental in promoting ISO 20022. SWIFT is also actively doing trials to investigate digital assets.
The digital asset ecosystem is still young, but it has enormous promise. Money issued by a central bank might be replaced with its digital equivalent, which could facilitate a more secure, efficient, and open market for buying and selling. Furthermore, wholesale CBDCs may have a significant impact on international money transfers. One day they could replace cash as a minor part of the monetary basis.
Collaboration between legacy financial institutions and fintech providers is essential to developing the digital asset market and the subsequent maturation of digital assets. Economic infrastructure, asset managers, service providers, and others must work together to achieve this. Integrated solutions are more robust than isolated innovation, which is why these partnerships are so important.
By utilizing established risk management frameworks and controls, conventional financial institutions stand to gain from participating in the new digital asset ecosystem. By doing so, they may better prepare for the dangers associated with the emerging asset class. The high volatility of digital assets is only one of the risks that conventional financial institutions must take into account. Therefore, they should initiate establishing policies and procedures for digital assets.
Authorities should also consider the need to regulate the digital asset ecosystem. The regulatory bodies must operate openly to ensure everyone is on the same page. Because of a lack of transparency in the ecosystem, it will be easier for regulators to enforce their standards if they can see what firms are doing.