Digital assets: The path to success

Considerations for banks offering digital assets to customers.


The banking industry faces several challenges due to recent economic, geopolitical and regulatory developments. KPMG has identified the top 10 issues facing banks in 2022 and beyond, and in this article we examine the topic of digital assets.
 

No longer a fringe element

With crypto currencies and other digital assets becoming attractive among retail and business customers as an investment, these instruments no longer represent a fringe element in the industry.

Banks that stay on the sidelines may be missing an important moment – so long as they are prudent when entering the marketplace.

Though they are complex and mystifying to many, cryptoassets represent $2 trillion in market value with roughly 200 million users.1 That said, bankers would be wise if they view them through the lens of trust, transparency, and auditability.


Taking Action in 2022 - Digital Assets

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Understand the customer need

Knowing which digital assets to offer customers is critical. Making the right decisions in that regard means weighing the risks and rewards of providing such products and services directly or, if it makes more sense, in partnership with another organization.

At the same time, among the questions to consider before entering the deep waters of digital assets is the extent to which a bank must modernize it custody models, due to the finality of transactions settled on public blockchains.

It is not a stretch to suggest that most banks’ traditional custody frameworks are not built for this asset class – and the time and cost to refit the models will be considerable. The work is do-able; it just requires a clarity of understanding and purpose before acting.

Never forget that absolute trust is essential in order to attract and retain digital asset-based banking customers – especially institutional customers. To that end, banks must be able to clearly demonstrate that their digital assets services are reviewed, tested, and audited by regulators and public accounting / auditing firms.

Determine the best path forward

Knowing that the bank wants to get into the digital assets business and actually being able to safely and profitably offer them are two distinct issues.

Among the most common refrain by proponents of digital assets is that they “democratize’’ financial assets to a broader range of customers on a peer-to-peer network of exchange. Our question to banks is this: Do their leaders really understand what that statement means? Even if a bank can answer that question in the affirmative, it must have the knowledge required to head down the correct path toward offering this often-mystifying asset class.

For many institutions their desire to get onboard may not yet match their capabilities in terms of risk management and clarity about these assets.  More than a few organizations have jumped on the “hot, new product’’ only to later realize that their knowledge level was low, and their risk was higher than they anticipated.

Research the regulations

Bank leaders should ask themselves: Do I have confidence that our institution understands current views and recent actions of our applicable regulators relating to digital assets?

Our research shows that successful adoption is largely driven by increased regulatory clarity (though we expect much more regulation to come shortly), a voracious interest among a growing sector of investors to “jump in,’’ and an increasing acceptance among an array of individuals and institutions of stablecoins and central bank digital currencies.2

Therefore, bank executives must be comfortable and knowledgeable about any move into digital assets … and not be reluctant to seek out highly experienced people and organizations to help guide them through the maze of digital asset products and regulation that is only getting more intricate.

Banks may also seek to partner with fintechs as a way to broaden their product offerings and gain access to relevant experience and capabilities.  But partnering with new organizations requires robust operational and regulatory due diligence on behalf of the bank.

Equally as important is the notion that banks have a clear grasp on data security relating to compliance and risk-management issues. Managers and boards must have fundamental comfort on the data risk front when considering digital-asset offerings.

For a more detailed view from KPMG on banks entering the crypto world, click here for our recent report on the topic.

Shifting to a higher gear
Download the full report to learn about all of the key issues impacting banks in 2022 and beyond

Footnotes

  1. “Bank of America Begins Research on Digital Assets,’’ Reuters, October 5, 2021
  2. “Banking Blueprint for the Crypto World,’’ KPMG, 2021


Connect with KPMG

Robert B. Sledge

Robert B. Sledge

Partner, Audit, Financial Services, KPMG US

+1 212-872-6481