The arrival of digital finance is imminent, and blockchain will play a big part in it—but a crypto finance crisis could soon follow. That’s the verdict of Simon Seiter, head of digital assets at finance firm Deutsche Börse, speaking at Digital Asset Summit London this week.

“There will be digital finance, and I think personally that DLT (distributed ledger technology) will play a big part of it,” Seiter said during a panel discussion on ‘The old guard vs the new blood: How banks will interact with crypto markets’. “For me, it's not a question of if it will come, but how will we deal with it when it comes?”

What could prompt a crypto crisis?

However, it’s not all sunbeams and rainbows. “I'm pretty sure that either we have already had our crypto crisis, or we will for sure have the crypto or digital finance crisis,” said Seiter, referring back to previous crises that resulted from the adoption of new financial practices and technologies. “Initially you had securitization, which was a revolution in the '20s; then you have the bubble, and then you have the crisis,” he explained. “Then you have electronic markets. And what was coming [next]? The dotcom bubble and the bubble of electronic markets.”

The problem, Seiter argued, was a lack of transparency. “People have a faulty misconception about transparency in DLT. Yes, everything on the transaction layer is transparent—but the investment layer, what you are actually buying, might not be that transparent,” he said. “People are starting to buy real estate tokens; have they seen the flat that they are buying? I don't think so, they’re simply buying it because it's going for €100. Then you're starting to see tokens of tokens, and tokens of tokens of tokens.” If the original assets being tokenized are overvalued, the result could be similar to the 2008 subprime crisis—a house of cards poised to collapse. “Then you have the next financial crisis in digital markets,” said Seiter. “The question is, can we maybe avoid the mistakes that we've already made in other markets?”

The case against the crypto crisis

Not everyone on the panel agreed with Seiter’s gloomy assessment. Christopher Tyrer, head of Bitcoin custody firm Fidelity Digital Assets, Europe, pointed out the subtle but key difference between infrastructure and markets. “I understand what Simon's saying,” he said, “but I think that the infrastructure on which things trade, transact and settle doesn't prompt the mania, it's just the means by which you interact with it.”

Tyrer argued that widespread tokenization is happening, though “how we get there is slightly more difficult to call.” One of the key pieces of the puzzle is a central bank digital currency (CBDC). “I think that's one of the key infrastructure pieces that needs to be put in place before you can really take tokenization to the next level,” Tyrer said. “Then you can have both parts of the trade occurring simultaneously; that's something that we've missed. Because people just, let's face it, aren't going to use Tether to settle a security token. Or maybe they will at this point in time, but that's not going to entice traditional financial services businesses into the space.”