Navigating digital asset value

The passage of the “Guiding and Establishing National Innovation for U.S. Stablecoins Act” or the “GENIUS Act” in the United States (US), along with the Trump Administration’s repeal of the Biden Administration’s banking, accounting, and crypto- asset safekeeping guidance, has transformed the economics and strategic imperative for digital assets worldwide.

‍

While the European Union (EU) implemented the Markets in Crypto-Assets Regulation (MiCA), and countries such as the United Kingdom (UK), the Bahamas, Hong Kong, and Japan have their own regulatory frameworks, licensing, and registration requirements, the US has lacked consistent cryptocurrency laws and regulations.  The passage of the GENIUS Act has significantly altered the calculation for US and global financial institutions for whether it made strategic or business sense to engage in crypto-assets and crypto-related activities, given the potential risks and lack of regulatory clarity. These concerns have been outweighed by the potential to reshape the financial landscape fundamentally.

‍

Major banks, such as Bank of America, Goldman Sachs, and UBS, have announced stablecoin initiatives, which have significantly contributed to the growth of digital asset market capitalization for stablecoins. At the time the GENIUS Act was signed into law byPresident Trump on July 18th, it was $164 billion USD. By November, it had surpassed $300 billion USD.

‍

The licensing and supervisory framework for stablecoins in the US has brought legitimacy to the broader digital asset market worldwide. Navigating the opportunities and value for these digital assets requires financial institutions, markets, and consumers to navigate the value of digital assets on blockchain (e.g., crypto, stablecoins, non-fungible tokens (NFTs), tokenized securities, etc.) with an analysis of the following market inputs and valuation factors:

‍

• Specific Digital Asset Construction
• Market Maturity
• Transaction Volume
• Price Volatility
• Speculation
• Investment Time Horizon
• Security
• Liquidity/Intra-Day Liquidity
• Settlement
• Yield
• Issuance Costs
• Network Effects
• Third-Party Pricing  

‍

ining companies, foundations, exchanges, and blockchain companies employ a distinct set of factors to evaluate the value of digital assets, which may differ from the approach of highly regulated financial institutions. Their valuations can be derived from the unique value created by algorithmic mechanisms, transparent market dynamics, governance protocols, lockups, and other forms of collateral value. The market for digital assets is quickly evolving, and financial institutions need to consider:

‍

• Are they confident in their understanding of digital assets to make informed business decisions and integrate into their enterprise strategy?
• Do they understand the legal and regulatory landscape in the countries where they plan to do business?
• Can the financial institution manage the significant risks and market volatility?
• With the 24/7 nature of digital assets, will they be able to monitor market risks in real time?
• Do they have the infrastructure to enable their business strategy, or do they need to build or partner with an infrastructure provider?

‍

These challenges are not to suggest that a financial institution should not engage in a digital asset business. Still, it highlights the unique risks and uncertainties associated with such a business. Financial institutions navigating digital asset value must weigh these risks against the benefits of enhancing liquidity through real-time settlement, reducing capital and operational costs on a blockchain, expanding potential fee income, and strengthening risk management to operationalize their strategy.

‍

The value of a digital asset, its associated risks, and market opportunities will be key in determining whether a financial institution is positioned to benefit from the economic incentives of a digital asset market.