NatWest’s payments and digital experts take a closer look at how DLT is transforming everything from the meaning of money to supply chain management, trade finance, and the capital markets, and discuss what that transformation means for treasury.

Originally, much of the interest in Bitcoin and its peers arose from it being an untraceable asset uncontrolled by central banks; today, an increasing number of users acknowledge that using other such digital assets but in a regulated way allows for greater transparency and could be a better, safer option. 

The massive gyrations in the value of private cryptocurrencies like Bitcoin has only lent further weight to the view that digital assets, like other financial assets, likely require strong regulatory oversight if they are to gain widespread use and enjoy comparable levels of stability (Bitcoin has lost nearly 60% of its value since November 2021, according to CoinDesk).

Against that backdrop, stablecoins (a coin whose value is pegged to an underlying asset or basket of assets) and pilots around Central Bank Digital Currencies (or CBDC, a digital currency issued by a central bank alongside cash and bank deposits) have received much applause. Financial market players have hailed their transformative potential to cut complexity and costs, lower market entry barriers, and improve security.

Almost all Central Banks worldwide are now actively looking into CBDCs. Some smaller economies have already introduced a digital currency, while some larger countries (such as China) have launched pilots. 

In the UK, the Bank of England (BoE) is still in the consultation phase around the creation of ‘Digital Sterling’. It published a number of resources to inform the public and a discussion paper in 2020, and established a taskforce in April last year to explore its creation.

Meanwhile, the launch of the BoE’s omnibus account, which allows innovative payment services to help reduce risks and save costs for UK financial institutions and businesses, is expected by the end of 2022.

While no panacea, digital assets  will almost certainly change companies’ business models – for the better. Here’s how corporate treasurers can expect to benefit as blockchain and digital assets make further inroads into financial markets:

• A more efficient back office: digital assets, which typically make use of blockchain tokenisation, will reduce, or even eliminate, cumbersome back-office processes.
• Better security and transparency: if carefully structured and well thought through, digital assets can increase security through evidenced ownership, accountability, and confidentiality – and improve transparency by making transactions verifiable and traceable.
• Improved auditing and reporting capabilities: more accessible audit trails can help treasurers simplify their regulatory reporting and enhance their ‘use of proceeds’ tracking for their green, social or sustainability bonds – which ESG investors demand.
• Speedier cross-border payments: digital currencies could have the greatest impact when used for cross-border payments, which currently challenge treasurers to monitor where payments are flowing to and when they arrive. Going digital will provide full transparency, while also cutting – or potentially eliminating – fees and charges.
• Benefits spread across the supply chain: finally, digital assets – with their underlying Distributed Ledger Technology – will improve trade and supply chain processes. With trade and supply chains still heavily reliant on physical documents, DLT has the potential to eliminate 90% of physical processes.

What’s next? In a mature digital world, a tokenised asset (for example a bond) and a tokenised (digital) currency will be exchanged in a so-called instant ‘atomic swap’ – an instantaneous exchange with zero settlement risk. 

Achieving such a digital environment would disintermediate the payment and other capital market processes currently required, while retaining the benefits such as stability and security, which a CBDC can provide. This is a powerful scenario that will ultimately reshape the relationship between fundraisers and capital holders, improving trust among counterparties 

While digital assets and currencies will reduce the number of intermediaries involved in payment processes, banks have the expertise to provide what users are concerned about most: tools that help to keep money safe. As such, banks will most likely be the partners of choice for corporates and consumers looking to move from cash to fully digital transactions.

Fragmentation – with banks, financial service providers and other organisations attempting to form their own network-exclusive digital currencies (such as attempted by Facebook with Libra) – would hinder progress of the digital currency market overall. 

Therefore, a collaborative effort is essential to ensure that digital currencies do not only work for selected groups but for all and connect all market participants. Interoperability and openness are essential features of the infrastructure lubricating global digital financial markets. Without it, a situation in which different CBDCs issued by central banks worldwide could to some extent reduce the potential of digital currencies (and the digital capital markets that make use of them) to become a faster, safer, and less expensive method of cross-border payment and capital transfer.

To learn more about how the latest financial and technology innovations could affect your treasury, visit the Treasury Tomorrow campaign page, speak with your NatWest representative, or contact us here.