ABN AMRO: Digitalisation of financial industry could boost prosperity

• Distributed Ledger Technology (DLT), tokenisation and digital currencies are leading to greater efficiency

• DLT is driving a gradual shift from a platform economy towards a protocol economy

• Digital currencies could increase prosperity, particularly in developing countries

DLT creating greater economic value through improved productivity

In the third instalment of its three-part series on cryptocurrencies, ABN AMRO takes a closer look at the underlying technology behind cryptos and what economic value this represents. Cryptocurrencies frequently use blockchain technology. Blockchain is a form of DistributedLedger Technology (DLT): a decentralised digital database with a shared consensus. “The benefit of having this consensus and data that are difficult to manipulate is that information can be shared more efficiently,” explains Ralph Wessels, ABN AMRO’s Head of Investment Strategy. “This creates economic value, by rendering various intermediary services unnecessary. However, one risk that a decentralised system brings, unless it is properly designed, is that it automatically results in less oversight and fewer controls.”

DLT can grant rights digitally. This ‘tokenisation’, as it is called, can be used for both tangible and virtual assets. It allows commodities, consumer goods, financial instruments and legal assets to be broken down into smaller components, making it easier to raise funding or to trade in them. As many of the intermediary roles are phased out here too, tokenisation is leading to further efficiency improvements.

From a centrally facilitated platform economy to a protocol economy

With intermediaries becoming redundant, this evolution is often compared to the emergence of the Internet. Where the economic impact of the Internet has mostly affected consumer goods and services, however, DLT could have similar implications for financial services and other products. According to ABN AMRO’s findings, the Internet and related developments have caused a shift from a centrally facilitated platform economy, where data were only infrequently used, to a platform economy making significantly more use of data. The bank predicts that the rise of DLT will cause a further shift towards a protocol economy in which data play the key role. In a protocol economy, the focus is on network building and limited involvement of intermediaries.

ABN AMRO expects digital money to create greater prosperity

Many of the world’s central banks are studying the possibility of having a digital currency of their own: a ‘central bank digital currency’ (CBDC). Another new form of digital currency is the stablecoin – a type of cryptocurrency that is backed by collateral and pegged to an underlying asset. Once regulated stablecoins or CBDCs become a reliable system for payment transactions, they can offer users access to banking services and products. Particularly in developing countries, this will lead to improved productivity and greater economic growth,which in turn could lead to greater prosperity.