Citibank’s Comprehensive Report on Cryptocurrencies and Blockchain

Citibank’s Report on Cryptocurrencies and Blockchain: Tokenization of Financial Assets, Progress of Central Bank Digital Currencies, Challenges in Decentralized Identity Verification, and Smart Legal Contracts

Citibank is one of the largest banks in the world, operating in over 160 countries. The bank is involved in various sectors including investment banking, personal banking, corporate banking, and service banking. By leveraging modern banking approaches, Citibank enhances service quality and offers contemporary financial solutions to its clients. This report focuses on the insights of Kathleen Boyle, Editor and Researcher at Citibank.

In recent years, blockchain technology and digital currencies have emerged as modern financial solutions based on technology. Tokenizing financial assets, smart legal contracts and decentralized identity verification are among the applications of digital currencies that enhance security and transparency in the financial system, enabling international transactions with greater speed and efficiency.

Decentralized identity verification, as one of the advantages of blockchain technology, facilitates secure transactions without intermediaries. This technology allows for authentication without personal information and helps preserve privacy.

Central banks around the world are seeking to utilize digital currencies to improve payment systems and increase their security and efficiency. Projects are underway for the development of central bank digital currencies (CBDCs) for dollar and euro. However, the use of CBDCs still faces challenges that need to be addressed, such as increased costs, privacy issues, and concerns about security and potential cyberattacks.

This article examines Citibank’s latest report on the tokenization of financial assets, the progress of central bank digital currencies, decentralized identity verification and its challenges, and smart legal contracts.

In recent years, the potential of tokenization on the blockchain has emerged as a global game-changer. However, this technology is not yet at the stage of widespread adoption. Blockchain, as a Back-End underlying infrastructure technology, lacks a prominent user interface and is harder to grasp compared to recent innovations like ChatGPT or the Metaverse.

Nevertheless, we believe we are nearing a turning point, and soon the potential of blockchain with billions of users and its multi-trillion-dollar value will be proven. True success will occur when blockchain has over a billion users who may not even realize they are using this technology. This goal will be achieved with the adoption of CBDCs by major central banks and the use of tokenized assets in blockchain-based games and social media payments.

It is projected that by 2030, approximately $5 trillion in CBDCs will be in circulation in major global economies, with half of that being facilitated through Distributed Ledger Technology (DLT). In other words, this indicates that Distributed Ledger Technology, as a related technology to CBDCs, can play a significant role in the creation and management of central bank digital currencies in the future. This decentralized, secure, and transparent technology can contribute to the creation and management of CBDCs and also aid in the development and expansion of central digital currencies globally. Tokenizing real-world financial assets can lead to significant advancements in blockchain technology. Tokenization in private markets is also expected to grow up to 80 times, reaching a value of nearly $4 trillion by 2030.

“CBDC, which stands for Central Bank Digital Currency, is a new type of digital currency that has transformed the payment system using new technologies.”

For blockchain to successfully align with its primary path, it needs the following infrastructure tools and technologies:

• Decentralized digital identity
• Zero-knowledge proofs
• Oracles
• Secure blockchain bridges

Creating smart legal contracts, which constitute a complete set for global trade and finance, requires changes to the relevant regulations. Regulatory considerations are also essential for the acceptance of these contracts. Although we believe that widespread adoption will occur within the next six to eight years, governments, large institutions, and companies have progressed from examining the benefits of tokenization to testing and validating the capabilities of this technology, accelerating the pace of adoption.

Why Convert Real Assets into Tokens?

Tokenizing real-world assets is an innovative method for monetizing non-liquid assets. For example, a numismatist or philatelist can tokenize a rare collection of coins or stamps. This is possible by dividing the assets and sharing ownership with buyers worldwide while keeping the original assets in a museum for display. This method will be effective in preserving ownership and creating liquidity.

Artists can also create videos on social media and sell their NFTs (Non-Fungible Tokens). These NFTs represent the right to own and use the artists’ videos for promoting and selling their products. Thus, tokenizing artwork generates returns on these pieces without needing centralized platforms. Tokenization provides solutions to traditional problems such as lack of transparency, liquidity, and democratic access. It also makes maintaining real assets on investors’ balance sheets easier, reduces the demand for liquid capital, and simplifies the collateral process. This means that real assets are maintained on investors’ balance sheets as digital tokens. In other words, tokenization allows real assets to be traded digitally, facilitating the process of buying and selling assets.

“The total market value for tokenized assets, at least theoretically, could be as large as the total value of all assets in the world and reach hundreds of trillions of dollars.” _{— John Wu, CEO of AVA LABS}

Billions of Users

Blockchain-based products have a significant impact on consumers in key areas such as money, gaming, and social media. In this section, we discuss:

How blockchain is creating fundamental changes in these areas?

Why is this happening now?

How can it reach billions of users?

Firstly, let’s discuss CBDCs. Major currencies such as the Euro (EUR), British Pound (GBP), and Indian Rupee (INR) are likely to be tokenized in the 2020s. In addition to the Chinese Renminbi (RMB), which has already been tested for several years, these four areas account for over 50% of the global population and 35% of global bank deposits.

Recently, there has been increased interest from regulators in CBDCs. In recent months, central banks of major countries including India and the European Union have announced their readiness to launch CBDCs.

While many technologies are still in the evaluation phase, blockchain and Distributed Ledger Technology have been thoroughly examined. It is estimated that about 20% of deposits will be shifted to tokenized assets. Therefore, CBDCs could potentially reach 2 billion users and over $5 trillion in value, with about half of this value potentially based on Distributed Ledger Technology.

Games could become one of the largest sectors for Web 3.0 adoption by users. In 2022, over 1 million unique active wallets connected to decentralized applications (Dapps) daily. With the emergence of advanced Web 3.0 games over the next 1 to 2 years, it is expected that the most active players (nearly 100 million “whales”) will be attracted to blockchain-based games.

The rise of Web 3.0 and the growth of the creator economy enable users to own their content. Web 2.0 companies are entering this space and bringing millions of users into the Web 3.0 world through their collectible avatars (NFTs). This signifies major changes occurring in the gaming industry and related technologies.

“We believe that new technologies like blockchain and NFTs will foster deeper connections between creators and fans.” _{–Neal Mohan, CEO of YouTube}

Central Bank Digital Currencies in Citibank’s Report

Key Points on CBDCs

1. Major Countries Launching CBDCs: Initially, only a few small countries and Nigeria launched their CBDCs, with China in the advanced stages of testing. Now, economically significant and populous countries are researching and implementing CBDCs. For example, the central banks of India, the UK, and Europe are planning to launch CBDCs (using Distributed Ledger Technology) before the end of the 2020s.

• Billions of Users: Considering only Europe, India, and the UK, there are about 2 billion users and businesses that might use CBDCs. Some countries are creating “blockchain bridges” for MCBDC (Multi CBDC), allowing businesses to use CBDCs based on Distributed Ledger Technology for international transactions. However, their native CBDCs may not be based on Distributed Ledger Technology.

“A blockchain bridge for MCBDC means a bridge created to connect central bank digital currencies of multiple countries. This bridge can serve as a solution to facilitate financial exchanges between countries and reduce the costs associated with currency conversion.”

• Technology: To date, only smaller CBDC projects have been based on Distributed Ledger Technology. However, some major banks will likely launch CBDCs designed based on this technology. For example, India’s retail CBDC might be designed in some way using Distributed Ledger Technology. Additionally, China has used this technology in creating the MCBDC blockchain bridge.

• Money Flow: Central banks predict that up to 20% of deposits will be transferred to digital money. Thus, around $5 trillion in CBDCs will be in circulation in major global economies this decade, with half of this amount likely facilitated through Distributed Ledger Technology. Together, the EUR, GBP, and INR account for about 15% of the world’s money supply or $15 trillion of $71 trillion.

Today, millions of businesses, including importers and exporters, conduct international activities and transactions. Using CBDCs as digital money in this context is highly effective, allowing these parties to perform international transactions with minimal cost and time. For example, the MCBDC blockchain bridge between China, Hong Kong, Thailand, and the UAE uses Distributed Ledger Technology and enables businesses to conduct international transactions easily and at minimal cost.

In addition to individuals, millions of businesses can utilize MCBDC established between different countries.

The popularity of CBDCs continues to rise among regulators. Central banks are interested in launching CBDCs for the following reasons:

• The announcement of the Libra stablecoin by the private sector, led by Meta (formerly Facebook)
•  China’s significant progress with E-RMB (or E-CNY)
• Growth in digital finance during the COVID-19 pandemic

This chart provides a survey on CBDCs and digital money. In this survey, user opinions are categorized into positive, negative, and neutral. If a user’s opinion is negative or explicitly states that there is no current plan for digital money, it is given a score of -1. If the user’s opinion is positive or the project is in testing, it is given a score of +1. Neutral opinions are also considered. In this figure, the blue line represents neutral and positive-negative opinions, the gray color indicates positive opinions, and the turquoise color represents negative opinions.

Impact of CBDCs on the Global Economy

A survey on CBDCs by the Bank for International Settlements (BIS) shows that emerging markets and developing economies (EMDES) have more motivation to launch CBDCs compared to advanced economies. With digital money, these countries can conduct financial transactions easily and at lower costs, which can help improve efficiency and increase effectiveness in the banking system. Overall, CBDCs as a new financial tool contribute to the efficiency and security of the banking system, especially as an effective tool for economic development and poverty reduction in developing economies.

Private digital money has limitations where users cannot transact with other users or foreign businesses. Additionally, its capability to convert into different forms of money is limited. However, a CBDC accepted nationwide functions as a cross-payment tool.

Private digital money, unlike central bank digital currency, has limitations that hinder its widespread use. One issue is the restriction in exchange with other users and foreign traders. Moreover, the ability to convert to different forms of money is also limited. With CBDCs, these issues are resolved. CBDCs act as a cross-payment tool nationwide, allowing users to exchange digital money easily. They also can be converted into various forms of money, facilitating exchange with other currencies. Furthermore, reserves held by central banks, such as gold and foreign currencies, are not easily transferable and thus not “fungible.” However, central bank digital currencies are fungible, allowing banks to use CBDCs as collateral for repo transactions, which are fungible and trusted. Overall, CBDCs are tools for capital management and improving the efficiency of the banking system.

The research and launch of CBDCs have somewhat accelerated after the introduction of private stablecoins. The launch of CBDCs can lead to greater adoption and use of stablecoin projects. Since CBDCs are issued by central banks and possess characteristics such as fungibility and higher credibility, stablecoin projects can use them as stable collateral to maintain the value of their assets. Overall, the launch of CBDCs could increase the adoption and use of stablecoin projects and enhance stability and trust in financial markets.

“Smart legal contracts can serve as the foundation for precise and effective economic planning and act as tools for ensuring security and trust in financial transactions.” _{–Don Tapscott, Founder of ConsenSys}

Case Studies

Digital Euro

The European Central Bank (ECB) is working with national banks in the Eurozone to launch the digital euro. The research phase began in October 2021 and is expected to last nearly two years. The ECB is examining how to design and launch the digital euro and its impact on the market. After the third quarter of 2023, three more years will be required for the digital euro’s launch; thus, it is expected to be introduced in 2026 or later.

Digital Pound

The Bank of England (BOE) and HM Treasury published a paper on launching the digital pound in February 2023, stating that a retail central bank digital currency with a public purpose is likely needed in the UK. This new digital form of money will be issued by the Bank of England for households and businesses for everyday payments.

The Central Bank’s motivation for launching a CBDC includes geopolitical concerns, the decline in cash usage, advancements in non-bank digital money institutions, and the improvement of cross-border payments. The Bank of England is in the initial research phase, and a final decision on its launch will be made after further work over the next 2 to 3 years. If the decision is made to implement the digital pound at the end of this phase, the wait time for its introduction will be reduced. Consequently, the digital pound is expected to be introduced in the second half of the 2020s.

Digital Dollar

There are three projects related to the CBDC dollar or dollar tokenization:

1. Digital Dollar Project (DDP)
2. Hamilton Project, by the Federal Reserve Bank of Boston and MIT’s Digital Currency Initiative
3. CBDC Research at the Federal Reserve Board (FRB)

The Digital Dollar Project is overseen by a non-profit, non-governmental organization aimed at researching, developing, and testing a digital dollar in the financial world. This project presented a white paper in May 2020, offering a prototype of a digital dollar for public examination and evaluation through tests and research. In November 2022, the Digital Dollar Project completed its first phase.

Social Networks

Social Media on a New Path

Today, Web3 advocates emphasize the need for a new decentralized system.

Blockchain-based social media can assist in authentication, account verification, and creating transparency in these processes. Blockchain’s ability to create a shared, immutable digital record of transactions helps users trace and verify the source of specific information, fostering trust.

Companies like Aave are developing platforms for decentralized social media, such as Lens Protocol, where users retain ownership of their cryptographic profiles. In contrast, ownership on Web2 platforms like Twitter and Facebook is centralized, with entities capable of imposing any restrictions. Users of decentralized platforms can create profiles, follow others, and generate and collect on-chain content. Consequently, content created on the blockchain is stored immutably, with no possibility of alteration or deletion. As a result, content ownership and control over dissemination channels lie entirely with users.

“Given the rapid growth of blockchain technology, increasing access to this technology through non-financial applications is crucial. This can lead to greater familiarity with blockchain and entry into this space through decentralized social media and blockchain-based games.”  _{— Stani Kulechov, Founder of Aave}

Blockchain-based social media platforms aim to offer an on-chain experience with features such as enhanced privacy, personal data ownership, and greater control over content. These platforms often use native digital tokens to enable users to earn revenue from their content. Although decentralized social media is growing, its user experience is not yet as complete as traditional social media platforms. However, with technological advancements and improved platform design, a brighter future is anticipated for decentralized social media. Ultimately, these platforms offer a promising alternative to centralized media in terms of privacy and data control.

Decentralized Identity

• Decentralized identity is a core component of blockchain technology that allows users to interact directly with each other without needing to trust a central person or organization. In blockchain, user identities are encrypted using private and public keys and stored on the network. This method facilitates user authentication while maintaining anonymous or semi-anonymous access.
• In decentralized identity, users can have direct control over their identity data and decide whom to share it with. This can enhance privacy and security while reducing the risk of data breaches and identity theft. In centralized platforms, data is fully controlled by centralized entities, which can modify or delete information.
• Overall, decentralized identity is a significant advantage of blockchain technology, enabling secure and direct interaction between users while preserving anonymous/semi-anonymous access. Additionally, this model can help increase individuals’ privacy and security.

In daily life, we use various authentication methods to access different services, with each system having its unique authentication model. For instance, accessing your email account requires a password, whereas crossing a national border requires a legal form of identification (such as a passport).

User identity on the internet is not centralized, and no one can directly control which user is using a particular account. In other words, the internet, as a system, lacks an internal identity layer. Instead, user identity is managed separately by different applications. For example, to access your email account, you need a username and password managed by the email service. Similarly, to access a website, you might need a username and password managed by that specific service. With an identity layer, users can access various resources with a single authentication, eliminating the need to re-enter usernames and passwords. Additionally, this layer helps different systems prevent account fraud and abuse.

Digitalization has changed how many tasks are performed, including transactions, communications, and trust. Today, we see the development of decentralized versions of various elements such as money, finance, and social media, though widespread adoption is still lacking. Decentralized identity is a crucial component for realizing the promises of Web3 or blockchain. It does not mean the absence of centralized entities but involves mechanisms for issuing or verifying identity, ownership, and sharing in a decentralized manner. However, the emergence of decentralized autonomous identity enables:

• Web3 adoption
• Addressing issues with centralized identity, including data modification capabilities

Yet, decentralized identity is still in its early development stages and faces the following risks:

1. Software and security challenges
2. Loss or theft of private keys
3. Tracking and mimicking of personal information by malicious nodes
4. Exploitation of personal data by surveillance capitalists or commodification

“Digital identity is the key to accessing the digital ecosystem, and blockchain is the future of finance and can help make digital identity more secure.”  _{— Dr. Ruth Wandhofer, Head of Payment Systems, Panel of Regulators}

The Ethereum Name Service (ENS) is a good example of decentralized identity. This service is an open-source, blockchain-based identity protocol that refers to a decentralized naming system for the Ethereum network. It allows users to perform transactions using custom names instead of long, complex wallet addresses. In other words, Ethereum Name Service enables transactions using custom names instead of wallet addresses. This system operates decentralized and based on blockchain technology, allowing users to register their desired names for use on the Ethereum network.

Ethereum Name Service is similar to the Domain Name System (DNS), which assigns human-readable domain names to Internet Protocol (IP) addresses in Web2.

For example, ERC-20 tokens (fungible or non-fungible) can be sent to ronitghose.eth instead of a lengthy cryptographic address. When identity recognition is simplified, remembering and performing business transactions also becomes easier. In other words, when digital identity is straightforward and accessible, users can efficiently conduct transactions and thus accelerate and simplify business processes.

In 2022, due to increased user demand, ENS registrations for the ‘.eth’ namespace experienced significant popularity. Protocols like .crypto or .lens are expected to launch with their respective namespaces.

“CBCDs can serve as a tool to increase efficiency and reduce costs in the banking system and improve money management and reduce risks associated with electronic payments.”  _{— Christine Lagarde, Managing Director of the International Monetary Fund (IMF)}

Head of the International Monetary Fund (IMF)

Smart Legal Contracts

Contracts create a legal relationship between two or more parties, but managing this relationship falls to the parties involved, who must find solutions. Therefore, how contracts are executed is crucial, as they are important both in business and personal life. Technological advancements have pushed contracts towards automation, increased speed, and enhanced security.

The question arises: what are the benefits and drawbacks of Smart Legal Contracts (SLCs), and do they relate to blockchain? According to Aaron Powers, Founder and CEO of Hunit, these contracts provide a comprehensive suite of new methods for conducting global trade and financial matters.

The best infrastructure technology for smart legal contracts is blockchain. Compared to traditional web platforms, blockchain offers specific advantages that can enhance smart legal contracts, including:

1. Automation of processes and reduction of transaction costs
2. Increased speed and efficiency in contract execution
3. Greater security compared to traditional contracts
4. Transparency and traceability of transactions
5. Reduction of disputes and interpretation conflicts by providing a reliable and trusted source through consensus mechanisms

However, smart legal contracts also have the following drawbacks:

1. Need for technical knowledge and awareness to use these contracts
2. Potential security issues due to contract design flaws or cyberattacks
3. Some countries and legal authorities may not fully recognize these contracts yet

Blockchain, as an infrastructure technology for SLCs, can help enhance these contracts. Blockchain allows transactions and contracts to be recorded in a decentralized, secure, and traceable manner. This means smart legal contracts benefit from blockchain’s advantages, providing greater efficiency and security compared to traditional contracts.

Although smart legal contracts have not yet achieved widespread acceptance, their use is expected to significantly increase soon. This is because efforts are underway to analyze and address the barriers that may limit the use of smart legal contracts, which could facilitate increased adoption in the future.

The UK is a leader in smart legal contracts. In November 2021, the Law Commission of England and Wales issued recommendations to the government and confirmed that these contracts can be utilized within the existing legal framework. Given the favorable regulatory developments, especially new laws related to digitalizing commerce, the path is being paved for the use of smart contracts, such as the Electronic Trade Documents Bill, which was introduced in October 2022 and is currently at the reporting stage in Parliament. The implementation timeline is still unclear. Smart legal contracts are applicable in various fields, including ownership and service contracts.

“I expect English law and dispute resolution methods in the UK to be a popular foundation for trillions of smart legal contracts.”  _{— Sir Geoffrey Vos, British Judge}

Legal Considerations

Like all technological innovations, smart legal contracts will only be accepted if laws and regulations do not hinder them.

The Law Commission of England has addressed the regulation of smart legal contracts in the context of English law. Their findings are significant globally due to the importance of English law in commercial transactions. These laws and practices, due to their long history and experience in the legal field, are recognized as some of the most important and reliable legal systems in the world. Legal considerations have been undertaken in several countries, including Singapore and the UK, which is positive for the adoption of smart legal contracts.