While blockchain technology and tokenization often make headlines, there is a less glamorous concept that may become the most vital element of the future financial industry infrastructure - the digital wallet. This software, protected by cryptography and built on blockchain, serves as a gateway to an internet address where tokenized assets can be stored. These wallets do not contain any personal information, only a series of alphanumeric characters, and are accessed using a digital key. This key is shared only when a wallet owner authorizes a transaction.
Currently, individuals and businesses operate with various financial accounts, each requiring different documentation. Individuals deal with checking and savings accounts, brokerage and investment accounts, liability accounts, and multiple accounts related to assets, valuables, and collectibles. Managing these accounts is often challenging, requiring the memorization of usernames, passwords, and manual aggregation of information.
Tokenizing these assets would allow them to coexist within a digital wallet, giving users an aggregated view of their entire wealth in one place. Cash could be spread across central bank digital currencies, cryptocurrencies, and stablecoins. Investments could consist of tokenized securities, funds, and assets. Liabilities could be represented as tokenized obligations, and assets and collectibles as non-fungible tokens, which include embedded contractual documents.
Every asset could be securely held and accessed using cryptographic keys either managed individually or by qualified providers. Additionally, an entity's digital identity could be linked to the digital wallet, facilitating easier interaction with different service providers and eliminating the need for individual know-your-customer compliance.
Efforts to realize this vision are already underway, such as the creation of a digital identity and wallet system across the eurozone as part of the European Digital Transformation agenda. Initiatives like the European Union Digital Identity Wallet pilot involve the participation of over 250 private companies and public authorities, encompassing various financial scenarios and broader applications like tax filing and document presentation.
However, challenges remain regarding the immature technology, security vulnerabilities, credit risks, regulatory uncertainty, volatile value/price fluctuations, acceptance by users and global marketplaces, and the risk of manipulation or fraud associated with the pseudo-anonymous nature of digital asset ownership records.