The rapid rise of digital assets has caught the attention of the financial sector, prompting a wave of experimentation and collaboration to test their transformative potential. The speed of innovation and the variety of possible applications has created uncertainty and confusion over their applications for treasury. 

Though digital assets won’t disrupt treasury overnight, they will in time usher in a different way for treasurers to raise funds and manage liquidity, improving governance and generating operational efficiencies while they’re at it.

While applications for treasury are nascent, what should treasurers consider right now to get ready? Here’s what we think can be done today to kickstart treasurers’ strategy when it comes to adoption tomorrow.

Ask most people what they know about digital assets and invariably their thoughts will jump to cryptocurrencies, stablecoins, or Non-Fungible Tokens (NFTs). Digital assets are, however, much broader than that. For many treasurers, the two most immediately applicable concepts to understand are tokenisation and digital currencies.

Tokenisation is a representation of an asset, or a representation of ownership rights to an asset, that is visible and exchangeable on the blockchain in the form of a token.

Tokenised securities – such as bonds and, eventually, structured debt products – promise several key benefits for treasurers. Issuance could become a lot more efficient, with time-consuming manual processes automated through smart contracts. 

Digitally issued securities could bring greater transparency to issuance and trading processes, with provenance of funds, for example, tracked through the blockchain. This could contribute towards improved compliance with Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations, boosting day-to-day operational efficiency.

Looking further ahead, disintermediation and operational efficiencies have the potential to reduce the cost of issuance, opening the market to smaller players who may have otherwise not been able to participate in traditional capital markets. The tokenised securities market could therefore become more liquid as these assets become more widely adopted, which could help companies diversify their funding avenues and investor base. 

Potentially reduced settlement periods coupled with greater disintermediation – bringing those in need of capital and those ready to deploy it much closer – could be a boon to asset-liability management and help reduce costs. Fundraising structures could take advantage of smart contracts to more precisely match the unique cashflow and liquidity management requirements of issuers and investors. This flexibility may also extend to collateral, increasing the range of what is available and acceptable beyond traditional assets.

On a fundamental level, a digital currency represents a token, which is required to enable atomic settlement and leverage the benefits of digital assets. Settlement occurs through the programmability of the smart contracts within the tokens, allowing for the tokenised securities to be exchanged for the tokenised currency, token for token, reaching finality and Delivery versus Payment (DvP).

Not to be confused with cryptocurrencies, Central Bank Digital Currencies (CBDCs) – digital currencies issued by a central bank alongside cash and bank deposits – will likely match the stability and resilience of the fiat currencies they are based on. The traceability and verifiability characteristics of the underlying distributed ledger technology (DLT) upon which many proposed CBDCs will likely mean they could do much to help address know-your-customer (KYC) and anti-money laundering (AML) concerns. 

These types of digital assets, if carefully implemented, could facilitate swifter and safer payments, shortening the settlement window and reducing the need for intermediaries, which in turn reduces associated risks.

There’s a lot of misinformation in the world of digital assets – with public perception heavily skewed by a few high-profile pitfalls. 

Corporate treasurers may well associate digital currencies with volatility, liquidity, and store-of-value challenges, but that’s mostly a feature of privately issued cryptocurrencies and the result of speculative investment. Stablecoins are a type of cryptocurrency and don’t always hold true to their name, with the stability of the currency being dependent on a number of factors, including the asset backing them and the redemption criteria. 

Fast-changing regulation does pose risks for some digital assets, as the governance of digital assets is an iterative process, developing in line with the technology and therefore not always matching the speed of the market. 

Poor liquidity in the early stages of the market’s development could also limit uptake – and therefore some of the benefits – that could be reaped. In order to reach the full potential of digital assets, a critical mass must be reached to create a strong network effect and justify the costs of adoption.

But when it comes to moving down the path of adopting tokenised assets and digital currencies, treasurers should start by carefully assessing the risks across three dimensions:

• Financial risks: exploring and understanding the fundamental impact digital assets could have on financial risk management and operations is key. For example, how might greater reliance on CBDCs for payments affect daily cashflow, liquidity, or corporate deposits? How might tokenised securities impact the cost of funding, and investment processes?
• Regulation & compliance: knowing the legal risks and regulations that apply to digital assets is essential. For example, how do regulators where you operate treat digital assets in terms of taxation? How do they require digital assets be accounted for on a balance sheet? 
• Ecosystems & interoperability: to reap many of the benefits outlined here, we believe the platforms and infrastructure that your company must rely on should be broadly interoperable (among other things – secure, resilient, and proven). Are your financial partners ready to come on this digital asset journey with you? And are they embracing open and interoperable services and platforms?

Continuing with the status quo will spare treasurers a lot of upheaval and expense in the short run, so being able to justify the time, energy, and cost of readying your organisation for digital assets will be crucial. It is therefore important to consider from the outset how you could evidence efficiency gains or productivity improvements. 

Starting the conversation early will help enable a smooth transition towards the adoption of digital assets. Remaining informed on market developments and learning from peers is essential.

Regulatory clarity should help to encourage the uptake of digital assets and help treasurers gain more confidence operating in a fast-evolving landscape. The need for regulation is supported by both the private and public sector, with significant collaboration underway as regulators learn from market participation.

The Financial Services and Markets Bill, currently going through Parliament, and the Financial Market Infrastructure sandbox it is proposing, promises to improve regulation and clarity. Similarly, the European Union’s Markets in Crypto Assets (MiCA) and the US’s Executive Order 14067 are designed to encourage safe experimentation and improve confidence in digital assets. The emergence of these frameworks demonstrates the commitment to advancing digital solutions in the market and acknowledges that DLT will be part of the future of finance.

Additionally, the UK Jurisdiction Taskforce (UKJT) issued a legal statement on Digital Securities which supports the use of digital assets under current English law. This provides a high level of legal clarity that English law can support the issuance and transfer of digital debt securities without waiting for changes to the law. This announcement is likely to instil trust in digital assets and provide the needed confidence for market players to participate further.

Staying close to developments, regularly engaging with trusted partners, and feeding back on regulatory consultations could help you stay one step ahead and shape the direction of the market in a direction which best supports your needs.

In the short term, digital assets are likely to be adopted in stages, with different players moving at different speeds. This will inevitably result in a hybrid market, with activity both on and off the blockchain. 

Bridging the gap between the old and new ways of doing things will have its challenges. Treasurers should prepare themselves for an intermediate period in which running old and new simultaneously seems somewhat inefficient. However, this period can be used to learn how to navigate digital asset adoption without overly disrupting traditional business.

Despite regulatory attention, a clear and concrete framework has not yet been implemented. Regulators and lawmakers are learning from market participation and looking to the private sector to guide the development of legal guardrails to not impose any restrictions that could impede innovation. This iterative process means that the move to the blockchain will be done cautiously, remaining mindful of current regulations whilst shaping future guidance.

Legal departments should be on top of the details, but it can’t hurt for treasurers to be aware of changes such as these – and how they will smooth out the path to adoption of digital assets.

Wherever your path towards digital assets begins, it’s important to talk to trusted partners about how they might be able to help. Whether gearing up to receive digital currencies as payment or planning to raise funding using digital capital markets instruments, early and frequent engagement with stakeholders and partners – internal and external – will be key.

Remaining informed on the different potential avenues will allow you to make the most suitable technical decisions to support business initiatives, understanding to what extent you should engage with digital assets and which capabilities should be incorporated internally versus outsourced to a vendor. 

Depending on the chosen strategy, certain infrastructure or provider investments will need to be made to handle digital assets. One important aspect is custody. To be able to receive payments in digital currencies, you’ll need a place to store them. There are many options available. They need not be in your own wallet. Regulated financial institutions do offer custody services. There are plenty of providers out there, and it’s important to assess how custody in a digital world works. 

Tokenisation, atomic settlement, and smart contracts have the potential to disrupt financial services and the forms that money take in our economy. They could improve efficiency, broaden functionality, and reduce risk in the financial system. But the benefits they offer can only be realised if implementation is carefully considered and constructively challenged.

We are working closely with industry partners and customers to ensure the currency, capital markets, and payments systems we rely on can respond to the demands of businesses – and new business models. Get in touch to learn more about how we can partner for a more digital future. Speak with your NatWest representative and follow us on social media to learn more about the implications of these exciting financial innovations for your financial strategy.