Decentralized Finance May Transform How Money is Managed
Once a “disruptive” revolution arrives, the way traditional financial markets operate will be rewritten. With blockchain, digital assets, and cryptocurrencies entering mainstream markets and being widely adopted, the speed of currency circulation may significantly accelerate. Despite some scandals in the industry, the concept of cryptocurrencies itself has attracted widespread attention, with large commercial entities in various industries and regions taking measures to plan, experiment, pilot, or adopt cryptocurrencies, stablecoins, and tokenized assets. Cryptographic assets are programmable and have the potential to replace some services currently provided by intermediaries such as banks, exchanges, or brokers. Blockchain or distributed ledgers can transparently create, store, and transfer digital assets in a real-time, immutable manner in decentralized peer-to-peer networks.
“Lara Abrash, head of Deloitte’s U.S. division, said: “The scale at which the industry is exploring indicates that the adoption of cryptocurrencies will be more extensive and could disrupt the existing economic framework. In order to responsibly move forward, we must prudently establish clear governance models to maintain transparency, fairness, and accountability.”
Many countries are developing regulatory frameworks that allow the use of digital assets in their financial systems. This can enable financial institutions, businesses, non-profit entities, governments, and consumers to conduct a wide range of transactions—from cross-border accounting and complex supply chains to payroll, welfare management, digital rights of intellectual property, taxation, and investment accounts.
Consumers can already choose to use stablecoins for various retail purchases without the need for traditional bank accounts, credit cards, or cash; however, these choices are often complex and expensive. In some countries where more people have mobile phones than bank accounts, a digital currency system may provide more equitable access to global citizens as costs and convenience increase.
Tim Davis, Chief Risk and Financial Advisory Leader for Blockchain and Digital Assets at Deloitte & Touche LLP, said: “The acceptance of tangible and intangible asset tokenization is increasing and may change the way entities, governments, and consumers conduct common transactions globally.”
The evolving landscape of business adoption, regulation, and tokenization, or the process of representing assets in digital form, provides a backdrop for how the monetary and payment landscape may expand to a critical mass, suggesting that companies may need to consider how to plan and embark on their own digital asset journey.
Davis noted that more and more brands are paying attention, with major platforms that are pillars of the modern global economy planning or considering the potential impact and opportunities of cryptocurrencies and digital assets.
“It includes mainstream banks and banking networks, credit card networks, and technology providers experimenting or operating blockchain network nodes or developing plans,” he said.
Rob Massey, Global and U.S. Tax Blockchain and Digital Assets Leader at Deloitte Tax LLP, said that PayPal’s adoption of cryptocurrencies is a key element for adoption—accessibility. Another example is JPMorgan, which has developed and deployed methods on blockchain to represent traditional assets to achieve frictionless settlement. Some products launched so far include the JPM Coin System (a blockchain-based ledger and payment system) and Onyx Digital Assets (a multi-asset tokenization platform), which allows financial institutions, asset managers, and fintech companies to record and represent financial assets as programmable tokens on the blockchain.
Recently, JPMorgan and Apollo Global Management released a report outlining their vision for tokenized portfolio management—a large-scale personalized portfolio that simplifies the order execution and settlement processes of traditional and alternative investments. The system will be supported by blockchain, smart contracts, and asset tokenization.
Goldman Sachs has also entered the digital asset field, conducting cryptocurrency trading and launching its digital asset platform. Goldman Sachs and companies such as S&P Global, Moody’s, Broadridge, and KPMG have joined Canton—a privacy-focused open blockchain network that uses smart contract technology to connect entities. The permissioned blockchain aims to provide interoperability and control to support synchronized financial markets, secure, controlled data, and value exchange.
Wendy Henry, Global Blockchain and Digital Assets Leader at Deloitte Consulting LLP, said: “The rapid development of blockchain technology to manage a large number of global transactions with the necessary transparency and privacy levels is becoming increasingly feasible.” “Enterprises, especially financial institutions, have the ability to build applications on public networks and establish tokenized assets, which is a significant step forward in the development of cryptocurrencies and digital assets. Although financial institutions have not yet fully utilized this capability on a large scale, it can be expanded to achieve broader adoption.”
Additionally, with the rapid development of generative artificial intelligence capabilities, AI platforms can act as agents representing humans in financial transactions.
Davis said: “Digital assets are well suited for AI platforms because funds can be transferred, controlled, and programmed directly, enhancing the way funds are used, which means new risks and returns, while the rapid development of AI may help accelerate the adoption of digital assets.”
Furthermore, platforms like Bitwave are emerging to bridge the gap between blockchain-based technology and traditional finance. Bitwave is a digital asset ledger that can be input into common enterprise resource planning systems to enable programmable funds, including payments to suppliers, customers, and employees. The platform supports accounting, auditing, and reporting of data captured in distributed ledgers—functions essential for expanding adoption.
Another important evolutionary step is layered networks on existing networks to aggregate transactions in a way that can increase traffic and processing speed. Just as high-rise buildings can increase real estate capacity in dense areas, second-layer distributed ledgers can benefit from the security of the first-layer network they are on, significantly reducing transaction costs and increasing processing speeds. For example, Optimism’s OP Mainnet is an open-source extension of Ethereum designed to expand the Ethereum ecosystem.
“As major platforms continue to roll out applications, consumer and corporate acceptance of cryptocurrencies and digital assets is rapidly increasing,” Davis said. “These are important indicators that global monetary and payment systems are poised for further disruption.”
Global regulation is evolving, with Deloitte’s Audit and Assurance Partner, U.S. Audit and Assurance Blockchain and数字资assetsMary Liu, saying, “The adoption of cryptocurrencies by PayPal is a key factor in providing access.” Another example is JPMorgan, which has developed and deployed methods on blockchain to represent traditional assets to achieve frictionless settlement. Some products launched so far include the JPM Coin System (a blockchain-based ledger and payment system) and Onyx Digital Assets (a multi-asset tokenization platform), which allows financial institutions, asset managers, and fintech companies to record and represent financial assets as programmable tokens on the blockchain.
Recently, JPMorgan and Apollo Global Management released a report outlining their vision for tokenized portfolio management—a large-scale personalized portfolio that simplifies the order execution and settlement processes of traditional and alternative investments. The system will be supported by blockchain, smart contracts, and asset tokenization.
Goldman Sachs has also entered the digital asset field, conducting cryptocurrency trading and launching its digital asset platform. Goldman Sachs and companies such as S&P Global, Moody’s, Broadridge, and KPMG have joined Canton—a privacy-focused open blockchain network that uses smart contract technology to connect entities. The permissioned blockchain aims to provide interoperability and control to support synchronized financial markets, secure, controlled data, and value exchange.
Wendy Henry, Global Blockchain and Digital Assets Leader at Deloitte Consulting LLP, said: “The rapid development of blockchain technology to manage a large number of global transactions with the necessary transparency and privacy levels is becoming increasingly feasible.” “Enterprises, especially financial institutions, have the ability to build applications on public networks and establish tokenized assets, which is a significant step forward in the development of cryptocurrencies and digital assets. Although financial institutions have not yet fully utilized this capability on a large scale, it can be expanded to achieve broader adoption.”
Additionally, with the rapid development of generative artificial intelligence capabilities, AI platforms can act as agents representing humans in financial transactions.
Davis said: “Digital assets are well suited for AI platforms because funds can be transferred, controlled, and programmed directly, enhancing the way funds are used, which means new risks and returns, while the rapid development of AI may help accelerate the adoption of digital assets.”
Furthermore, platforms like Bitwave are emerging to bridge the gap between blockchain-based technology and traditional finance. Bitwave is a digital asset ledger that can be input into common enterprise resource planning systems to enable programmable funds, including payments to suppliers, customers, and employees. The platform supports accounting, auditing, and reporting of data captured in distributed ledgers—functions essential for expanding adoption.
Another important evolutionary step is layered networks on existing networks to aggregate transactions in a way that can increase traffic and processing speed. Just as high-rise buildings can increase real estate capacity in dense areas, second-layer distributed ledgers can benefit from the security of the first-layer network they are on, significantly reducing transaction costs and increasing processing speeds. For example, Optimism’s OP Mainnet is an open-source extension of Ethereum designed to expand the Ethereum ecosystem.
“As major platforms continue to roll out applications, consumer and corporate acceptance of cryptocurrencies and digital assets is rapidly increasing,” Davis said. “These are important indicators that global monetary and payment systems are poised for further disruption.”As the head of the Digital Asset Group, Brian Hansen stated that many jurisdictions around the world are establishing regulatory frameworks for digital assets. The Financial Stability Board of the G20 and the International Monetary Fund have provided comprehensive guidance on how authorities should address the macroeconomic and financial stability risks posed by crypto asset activities and markets. The EU’s “Regulation on Markets in Crypto Assets” enacted in June 2023 sets rules for unregulated crypto assets within existing financial services legislation. The Securities and Futures Commission of Hong Kong has issued regulations on tokenized assets, stablecoins, and crypto trading.
Approximately 130 jurisdictions globally are launching, piloting, developing, or researching Central Bank Digital Currencies (CBDCs), although U.S. regulatory agencies are still in the early stages of conceptualizing a U.S. CBDC. California has also passed two bills to establish a virtual currency licensing regime and regulate digital financial asset transactions.
At the federal level in the U.S., the regulatory tone is different, as the risks and volatility of cryptocurrencies have prompted the government to increase scrutiny in various areas. The Financial Stability Oversight Council issued a report finding that the connection points between digital assets and traditional finance could pose systemic financial risks, urging federal agencies to continue enforcing existing rules and regulations. The Securities and Exchange Commission (SEC) has approved several physically-backed Bitcoin ETFs for trading, a significant development for the U.S. market, paving the way for Bitcoin investments in traditional brokerage accounts.
From a regulatory standpoint, the Financial Accounting Standards Board has developed guidance on how companies should account for cryptocurrencies and other digital assets under GAAP. The IRS has also issued guidance on digital assets, treating them as federal tax property. Meanwhile, banking regulators are urging financial institutions to enhance risk prevention awareness.
Tokenization is taking shape
Davis stated that as technology adoption and regulation continue to evolve, the global financial ecosystem is gradually moving closer to a tokenized economy where assets are presented in digital form on the blockchain, with decentralized value exchange.
Non-Fungible Tokens (NFTs) have garnered attention in specific fields like sports and art, but blockchain technology and the evolving regulatory environment can support the tokenization of a wider range of tangible and intangible assets when risks are understood. These assets may include securities, loans, public and private funds, hedge funds, money markets, private equity, environmental credits, real estate, commodities, ownership rights, voting rights, and content licenses. Tangible items can be transformed using coding rules and proofs, and can be traded via the blockchain to significantly enhance efficiency and transparency.
“Tokenization offers many potential benefits that are becoming increasingly attractive,” said Massey. “Consider the typical costs and frictions associated with transactions (such as commercial loans) and how tokenization and value management through distributed ledgers can improve this process.” By encoding tokens using smart contracts and other automation tools, they can be almost instantly executed, cleared, and settled. This process can be faster, cheaper, and provide round-the-clock access and enhanced transparency.
Digital assets and tokenization can help companies better manage stranded cash on their balance sheets.
Massey said: “It can allow them to explore new ways to facilitate cross-border payments, repatriate cash, and improve working capital management. It can significantly improve wage processes, providing a way to compensate employees continuously or periodically, such as paying gig workers based on tasks completed or paying daily wages. Tokenization can simplify many traditional banking processes by reducing settlement times and costs.”
Henry stated that ultimately, tokenization may give rise to a programmable currency system where value is embedded in smart contracts, with terms and conditions encoded. She said: “Even without third-party intermediaries, companies can significantly improve costs, efficiency, and transparency, which could greatly change how they handle their accounting and finance functions.”
For example, consider the frictions often encountered in cross-border payments, which require layers of processes, regulatory reviews, and costs. With tokenization and programmable currency, transactions can be executed instantly anytime, anywhere. They can be automated based on certain trigger events and have built-in transparency and control. Funds do not have to be tangled in payment channels but can be deployed according to working capital strategies and used when needed.
How to take action
Abrash said: “While there is still uncertainty among regulators about how decentralized financial systems will develop, many organizations see the potential advantages of such systems, prompting more and more organizations to launch or consider launching their own digital asset strategies. Companies can consider various approaches to plan and embark on their digital asset journey.”
Build cross-functional teams. Assemble a team from across the enterprise (finance, treasury, accounting, technology, legal, risk, tax, compliance, operations, supply chain, human resources, and marketing) to explore what is happening in the crypto and digital asset space and consider opportunities and risks.
Understand blockchain and Web3. Understand how enterprises can benefit from a transformed method of data sharing and verification that provides transparent, immutable transaction records without intermediaries. Consider possible use cases where accountability and auditability are crucial, and where data needs to remain at a distance in a multi-party open and transparent manner.
Consider potential uses of cryptocurrencies. While the cryptocurrency market is highly volatile and has seen significant failures, it is gradually maturing as people become more familiar with cryptocurrencies and more disciplined and rigorous. After significant efforts, analysis, planning, and execution in risk and opportunities, rules and regulations, and processes and controls, companies can consider using cryptocurrencies for investment, purchase, sale, holding, and opportunities for receiving or making payments.
Massey stated: “As the cryptocurrency and digital asset space evolves, barriers to entry and scaling are gradually disappearing. The global economy is moving towards widespread adoption of these new business models.” When cryptocurrencies and digital assets become more accessible and tradable than fiat currencies and traditional processes, the market may see a wave of adoption that changes the way value exchange operates.
