In just a few years, blockchain technology has gone from being limited to cryptocurrencies to becoming a tool used in many other areas, such as asset tokenization or digital identity. The future lies in its interoperability with the centralized world, which can provide the 'blockchain' with greater speed and efficiency thanks to the liquidity of the institutions.

October 31, 2023 marks 15 years since the publication of 'Bitcoin: A Peer-to-Peer Electronic Cash System', the white paper that created bitcoin. That paper by developer Satoshi Nakamoto first proposed the idea of a distributed ledger system and decentralized cryptocurrency. This system would allow transactions to be carried out between two parties directly without the need for intermediaries, using cryptography and a decentralized network of computers to validate and record transactions in a digital block. This is how the foundations of the 'blockchain' were established.

"Nakamoto's role was a key catalyst for the development of this technology and he laid the foundations for the creation of the most popular and used cryptocurrency, bitcoin," says Antonio Sundas, digital assets specialist at BBVA Switzerland. "The concept sparked the interest of the technological and financial community and in 2009 the first Bitcoin software was launched based on its ideas." Since then, the 'blockchain' has not stopped experiencing important advances.

In addition to numerous new cryptocurrencies, other types of “tokens” have also been created for purposes other than payment, such as demonstrating ownership of shares in a company or providing access to specific services on a platform. Or 'smart contracts', that is, smart contracts that allow the automatic execution of an agreement between the parties. At the same time, the technology also acquires increasingly sophisticated transaction validation mechanisms, aimed at ensuring efficient, decentralized and secure use.

Digital assets for real assets

Thanks to these advances, the use of 'blockchain' has also become more sophisticated over time and has aroused the interest of banks, which want to take advantage of the potential of the technology.

"In the financial environment it has always been thought that 'blockchain' could change the way of exchanging value and information," explains Francisco Maroto, head of Blockchain and Digital Assets at BBVA. "That basic premise remains valid. But, although initially very focused on payments, on transactional banking, behind payment cryptocurrencies like bitcoin, the use cases have gradually moved towards the 'tokenization' of traditional financial assets That is, with this technology a representation of these assets is created that allows a more efficient exchange."

This "tokenization" of real assets is possible thanks to financial decentralization, or DeFi, which emerged after the creation of financial protocols based on "smart contracts." Initially, the protocols focused on debt creation, loans and exchange houses, but they have expanded their scope. An example is the issuance of the first regulated bond registered with blockchain in Spain, in which BBVA participates with Bolsas y Mercados Españoles (BME) and the Inter-American Development Bank (IDB). The use of blockchain reduced the cost and time of bond issuance, demonstrating that this technology has great potential for smaller issuers and less developed economies.

"Decentralized finance and the 'tokenization' of real assets help facilitate access to advanced financial services that were previously inaccessible to most people due to their geographic location or income level," says Antonio Sundas. They also increase the efficiency of the system by reducing intermediaries, costs and settlement times. "Smart contracts and automation can simplify and accelerate many financial processes, with less risk of human error and greater transparency in the traceability of transactions," he explained. "This reduces the risk of fraud and can increase confidence among investors and other market participants."

Interoperability and regulation challenges

The future of the crypto environment could focus on the integration between decentralized and centralized capabilities. "One of the strong points of blockchain, open development, has the drawback of having more limited investments," explains Maroto. "In that sense, the injection of liquidity provided by institutions gives the centralized world a speed and efficiency that 'blockchain' has not yet achieved. We need to ensure that both models coexist and are interoperable."

This interoperability will be important, for example to ease the relationship between users, public administrations and service companies, as it is working on blockchain use cases to create a real, secure and self-managed digital identity for users. There are already projects underway, such as Dalion, in which BBVA participates, which is developing a digital 'wallet' where users can control how their data is managed and who owns it.

Regulation is one of the big milestones of the 'blockchain' ecosystem. The United States Securities and Exchange Commission is working in this direction and the European Parliament has already approved MiCA, the European Cryptoassets Markets Regulation that establishes standards for the issuance of cryptoassets and stablecoins, as well as the provision of services in this area. The regulatory frameworks are expected to provide stability to the decentralized environment and help minimize one of its major challenges, the high volatility of the price of cryptocurrencies. These have faced a general collapse between late 2022 and early 2023, with some losing 99% of their value in 72 hours.