Published on International Banker
Many countries are looking to transform their economies into digital ones, with the aim to progress from a production-based to a service-based economy, and also to increase economic and societal value for their nations. A digital economy requires more than just ambition. It needs the development and establishment of ecosystems that bring a nation’s economy, businesses and society together into an integrated and coherent system.
Governments, especially those of developing economies, realise that their countries might be caught in middle-income traps, income inequalities and/or social and economic imbalances. This leads to the desire for long-term, national development strategies with ambitious objectives, not only economically but also socially, specifically to raise competitiveness and increase the value of products and services delivered to their societies.
Such aims are usually based on multiple values and driven by innovation—moving from producing commodities and agricultural goods to technology-based, innovative products. Many countries call this a digital or smart economy by emphasising technology, creativity and innovation in industries and areas with significant growth potential. Other objectives for such an economy might include sustainability, environmental protection, health, prosperity, social welfare and poverty reduction, many of which are represented by the United Nations’ 17 Sustainable Development Goals (SDGs).
What is a digital economy?
In a digital economy, everything is connected with anything at any time, which is why it is often also called a smart economy. Three fundamental elements required for such an economy are:
- Digital assets,
- Digital identities and
- Smart contracts.
This article’s main focus is on the significance of digital assets in the context of a digital economy. Digital assets are understood to cover not only the traditional financial-instruments space but also non-materialistic values, such as personal data—including identity, health and medical, geo, behavioural and social data.
To make this less abstract and more tangible, the envisaged ecosystem(s) could be represented in the following diagram, with the Digital Asset Platform (DAP) at its core.
Given this—admittedly simplistic—high-level structure, it becomes clear that the foundation of value creation consists of infrastructure, utilities and public services, including non-material factors. Most importantly, solid financial infrastructures and systems are required to enable the exchange of products and services within and between the various ecosystems.
A digital-assets ecosystem in the context of a digital economy
A digital-assets ecosystem can have a widespread transformative impact on an economy as a whole as it is based on data generated from transactions across the ecosystem and on allowing other ecosystems to collaborate with digital assets and their marketplaces. If implemented across a whole country, digital assets, in conjunction with distributed-ledger technology, can integrate and interconnect all parts of the economy and society from healthcare to education, human resources, taxes, welfare systems, pensions, energy, transportation, cyber-security, secure and trustworthy identity documents, law enforcement, government, taxes, financial services… the breadth of applications is enormous.
Additionally, utilising digital assets and diverse, distributed yet interconnected blockchain variants will enable these sectors of economies, societies and financial markets to grow at a scale corresponding to their priorities and needs. A trusted digital-assets ecosystem is the foundation of an inclusive economy and, therefore, facilitates the means by which products and services are exchanged among participants within and across ecosystems.
Digital assets will allow the introduction of new forms of asset ownership by issuing various forms of digital tokens. The aim is to reduce friction in the current system, increase transparency, reduce costs and directly link the input with the output of a tokenised asset. Also, digital assets allow fractional ownership, thereby contributing to financial inclusion for underprivileged citizens.
Some use cases below illustrate the application of digital assets and how they can underpin a financial ecosystem to enable financing and the use of underlying assets. There are two fundamentally different strategic goals to achieve: innovative or disruptive business cases. In both cases, a DAP can serve a national economy and act as a marketplace facilitator:
- Innovative: Fundraising for new infrastructure—benefiting the society:
- Raising capital, e.g., by a public-private partnership and directly linking the output generated with the end-users by issuing asset, utility and/or payment tokens.
- Examples: electricity, clean water, transport, digital services, etc.
- Disruptive: Change the current state of personal-data ownership and offer a fair economic reward for data use (gig economy):
- The owners of personal data decide on the use of their data by third-parties and are fairly rewarded for allowing such third-parties to use their data.
- Tokenised personal data sourced from social-media platforms can be shared on commercial digital platforms.
- Stakeholders involved could be data owners, utilities, insurance companies, specialised investment firms, commercial data vendors.
- Innovative: Enable use-case restricted funding (financial inclusion):
- Social initiatives and programs established to assist low-income beneficiaries.
- Tokenization allows governments to manage how the recipients of government support for basic necessities can use tokens for only specific purposes, such as housing costs, medical treatment, utility bills, food costs.
- Facilitate innovative micro-enterprises that need funding for their purpose-driven business ideas.
- Offer easy access to funding by issuing equity/debt on the chain (micro-finance as a service).
- Improve access to public and private services for underprivileged citizens; tokenise goods and services that can be consumed with a payment or utility token on a marketplace (token economy). Government-supported programs through which private-sector entities could be token-issuers.
Ecosystem dynamics and the need for an “ecosystem of ecosystems”
Creating one or many digital ecosystems will not suffice. The reality is that ecosystems (co-)exist and evolve in many different forms of networks and horizontal-to-vertical structures. Given this complexity, we should expect a non-linear transition from the existing environment to a multi-ecosystem landscape in the future.
This situation will create the need for an “ecosystem of ecosystems”, which will align interests and consider the different maturities and structures of each ecosystem, thereby enabling interoperability.
Such a complex super-ecosystem requires significant thought leadership and design effort. This can be visualised and documented in a blueprint that integrates the vision of a digital economy with the fundamental elements to create a functioning digital economy. A digital-assets ecosystem is an integral part of such a super-ecosystem. Its purpose is to bring capital and non-capital markets together with end-users, i.e., the ultimate beneficiaries, and to facilitate primary and secondary markets for digital assets. A pragmatic approach would be to consider a hybrid system—i.e., a decentralised architecture with a governance structure in line with centralised governance and regulations.
A market infrastructure for digital assets
To provide understanding, we visualize a digital-assets market infrastructure platform as the core of a national digital ecosystem. It builds on the functions of an existing securities exchange but expands into a DAP with many more functions and services. The diagram below provides an overview of possible products, services and stakeholders of such a DAP.
The role of a DAP in a digital economy
One of the critical issues to be considered in a digital economy is the role of a DAP. Will it be a service provider or access provider, both or anything in between?
An inclusive digital economy will need a strong foundation with a solid governance framework (possibly partly decentralised) supported by governments, politicians, lawmakers, regulators and whole societies, as well as businesses, industries and service providers.
A big challenge lies in coordinating a DAP with peripheral systems, both domestically and internationally. The overall system architecture needs to be designed in a pragmatic yet forward-looking manner. The successful implementation of a digital-assets ecosystem will require collaboration with other ecosystem participants, inside and outside the digital-assets ecosystem. Such a platform should also allow the interoperability of different blockchain protocols and legacy systems.
One integration example is the evolving digital-payments infrastructure in both the wholesale (bank-to-bank) and retail sectors of the economy. The integration of wholesale and retail-payment infrastructures is important to fulfil the promise of a digital-assets ecosystem as the cornerstone for an inclusive economy.
As an example, the implementation of a central bank digital currency would provide an important element, in combination with a digital-assets ecosystem, in a decentralised architecture. Alternative options to integrate end-users (consumers and beneficiaries) are required to facilitate B-2-C (business-to-customer) and C-2-C (customer-to-customer) transactions. This could be mobile-payment wallets of various types—e.g., prepaid with fiat currency or payment tokens.
The factors for a successful transition into a digital-assets ecosystem
Beyond the functional structure of a digital-assets ecosystem, there is a need for enabling functions to transform the current market infrastructure into a DAP. These will include all required activities to align the public, government, regulatory authorities and business partners with the objectives of a nation-wide digital ecosystem.
The following tasks and initiatives are the key transformation drivers to assure the successful establishment of a DAP:
- Stakeholder management,
- Design and development of ecosystem(s),
- Research: legal, regulatory, financial, social topics.
This article has outlined the complexity of a digital economy, the significance of digital-assets platforms and ecosystems as well as their integration. To succeed, a digital economy requires an overarching architecture and an aligned and coordinated implementation strategy. Ultimately, the biggest challenges are cultural and leadership. Technology is only the enabler.