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Digital assets have been ubiquitous in the news these days: cryptocurrencies, stablecoins or non-fungible tokens (NFTs), to name a few. Their applications are even more varied, from representing financial instruments to safeguarding authenticity and ownership of digital IP or physical assets. Enterprises that engage in digital assets have significant opportunity to deliver meaningful value to their customers with new service and business models. Following the recent webinar featuring Martha Bennett, VP and Principal Analyst at Forrester Research: Digital Assets, A New Paradigm For Financial Services, I had the opportunity to ask her a number of important questions to consider for any organization looking to bring digital assets into their enterprise.
What are digital assets, and what are some examples?
In this context, we’re looking at the different types of digital assets that are represented on a blockchain or distributed ledger network, most commonly in the form of a token. Tokens are either fungible (i.e., one can be substituted for another) or nonfungible (i.e., each is unique). Those tokens can be cryptocurrencies, stablecoins, or tokenized representations of existing financial instruments like securities and bonds. Tokens can also be used to safeguard the authenticity and track ownership of digital artwork and other forms of digital IP. Last, but by no means least, tokens can represent physical assets as well as business-critical documentation such as invoices or bills of lading.
What are the business opportunities around digital assets?
There has been a steady increase in investor demand for new asset classes, as well as for finding more effective ways of supporting shared ownership and making currently illiquid assets more accessible to a wider investor base. There’s also a strong efficiency and innovation angle: the self-describing and programmable nature of tokens allows processes to be completed faster and more accurately, and it opens opportunity for new service and business models.
What are the security risks and compliance requirements?
Given that there are financial assets at risk, the minimum requirement is bank-grade security. In the case of digital assets, security requirements arguably go beyond, given the nature of the technology involved (e.g., transactions can’t be reversed, and the compromise or loss of keys has grave consequences). Different asset types have different risk profiles, and firms need to decide on their preferred risk posture. From a compliance perspective, it’s important to understand that the regulatory environment remains fluid and is subject to rapid change.
While some countries have updated relevant regulations and even legislation to reflect the nature of digital assets, others are far less advanced, and some even forbid financial institutions from handling crypto-assets. A country-by-country approach is essential. Firms also need to consider the differences between states in the U.S. and provinces in Canada. The forthcoming Markets in Crypto-Assets (MiCA) regulation, for example, will bring clarity to an entire region; those wanting to offer services now will have to engage with the respective regulators in every country. Depending on the asset, they will also need to consider the environmental footprint.
What needs to be considered from a technology perspective?
As already mentioned, having the strongest possible security is crucial. Other fundamental requirements include a modern infrastructure based on containers, microservices, APIs, and hybrid cloud. There’s unlikely to be a digital asset use case that won’t require advanced analytics and forecasting tools, as well as AI. And very importantly, digital assets that represent a physical item need to maintain a connection to it to ensure that it hasn’t been tampered with. Depending on the use case, this may require a plethora of additional technologies, both IT (e.g., internet of things, geospatial and location data, computer vision) and non-IT (e.g., tamper-proof packaging, nanotechnology to mark materials, hyperspectral imaging). The same technologies come into play for assets representing an organization’s carbon footprint or emissions exposure.
What options are there for entering the digital assets business?
This depends on several factors:
- How soon your institution wants to offer digital asset services
- The type of services your firm wants to offer — just custody, trading and custody, token issuance, or other business services
- Your firm’s desired degree of control over available functions
- Your firm’s appetite for risk and innovation
All options are supported today. Firms can use standard outsourcing arrangements and white-label services or develop their own solutions, incorporating off-the-shelf software components as needed. Extremely thorough due diligence is a must — among the plethora of available solutions, comparatively few today are truly enterprise-grade with appropriate security levels.
This is an exciting time for enterprises to start seriously evaluating how to leverage digital assets in their business. The opportunities to introduce new services and products, while minimizing risk and costs, have never been greater. To proceed on your journey with confidence, make sure you stay apprised of the latest developments and reach out to us as you map your strategy.
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