In our last expert Q&A, we asked WIT expert Dr. Boris Richard, a cryptocurrency and finance expert with more than 25 years of industry experience, for his thoughts on where the financial technology industry was headed regarding the increasing use and adoption of digital assets. To delve deeper into what’s next for industry trends, we reconnected with Dr. Richard to discuss the latest crypto innovations and advancements in financial technology and how they might impact the industry.

WIT: Can you discuss the latest advancements in blockchain technology and their implications for financial technology and cryptocurrency applications?

Dr. Richard: I see five areas of advancement that are contributing to the evolution of blockchain technology in the fintech sector:

• Enhanced Interoperability: We are seeing significant strides in the interoperability between private blockchains as well as the development of hybrid blockchains that blend public and permissioned elements
• Layer 3 Protocols: The introduction of Layer 3 protocols enables the creation of application-specific blockchains to improve scalability and reduce transaction costs
• Smart Contracts on Bitcoin: The integration of smart contracts into the Bitcoin network, particularly through layers such as the Lightning Network, allows for more complex functions and operations to be executed directly on Bitcoin’s blockchain
• Rune Protocol for Bitcoin: The Rune Protocol is a new token standard for the Bitcoin network. It allows for the launch of various types of fungible tokens directly on Bitcoin’s blockchain, expanding its functionality and application potential.
• Metaverse Gaming and In-Game Transferrable NFTs: The rise of metaverse gaming and the integration of transferable NFTs within these virtual environments are creating new avenues for blockchain in entertainment and digital asset ownership

WIT: How are traditional financial institutions adapting to the rise of decentralized finance (DeFi) and other disruptive fintech innovations?

Dr. Richard: For traditional financial institutions to adapt to the rise of DeFi and other fintech innovations, there are five areas that still require a lot of work:

1. Enhanced Security Measures: There is a need for enterprise-grade security solutions, including the development of enterprise wallets that can meet the demands of large-scale financial operations
2. Qualified Custody: Financial institutions are having issues with the complexities of providing qualified custody for digital assets, which is essential for regulatory compliance and investor protection.
3. Standardization of Technology: The lack of common tech standards across settlements, payments, asset transfers, and tracking is creating a significant barrier.
4. Regulatory Compliance: Adapting to the regulatory requirements of anti-money laundering (AML) and know your customer (KYC) protocols, particularly in implementing wallet whitelisting policies and procedures, remains a substantial challenge.
5. Market Integrity: The vulnerability of the DeFi space to market manipulation is a concern that requires ongoing attention to ensure the stability and integrity of financial markets.

WIT: What are the key challenges and opportunities facing companies operating in the fintech and crypto space in 2024, and how should they navigate them?

Dr. Richard: I see two key challenges facing those operating in the space this year:

• Challenge 1: Regulatory uncertainty – the US, with its “Howey Test” legal framework dating back 1940s, is still lacking a coherent legislative and regulatory foundation for digital assets. Additionally, we have seen more aggressive efforts by the US government to criminalize crypto software developers whose applications (mainly privacy-oriented) have been or can be used by money launderers to obfuscate the trail of stolen and/or laundered funds.
• Challenge 2: There is a difficult macroeconomic environment for digital assets, which are the ultimate risk-on assets. This means a combination of high interest rates, high inflation, and slowing economic growth.

Conversely, I see two opportunities for growth in this space:

• Opportunity 1: Tokenization of real-world assets, including new tokenization concepts, for example “Directive Tokenization” as explained here: https://blog.ondo.finance/introducing-ondo-global-markets/.
• Opportunity 2: The implementation of artificial intelligence applications to blockchain and digital assets, which will prompt:
  • Access to private decentralized data stored on blockchain, which is required for AI applications, data authentication, and data quality verification
  • AI and ML tools for asset tracking and blockchain analytics
  • AI-enabled smart contracts
  • Deployment of AI applications (AI agents) on the blockchain

Need help navigating the evolving cryptocurrency market and its ongoing legal disputes? Reach out to learn more about WIT’s fintech expert team which was created to address what we expect to be the key areas of litigation in emerging financial technologies, digital assets, cryptocurrencies, and exchanges.