Digital assets: The path to success

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.

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.

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.