24 Nov 2022
Embracing change and preparing for a digital future
In November, NatWest Trustee and Depositary Services (NWTDS) held an in-person event on the topic of embracing change and preparing for a digital future. To read the key highlights from the first part of the day click here.
The second half of the event saw James Green, Head of Portfolio Insights at NatWest Trustee and Depositary Services host a panel discussion on the digital asset revolution.
The digital asset revolution
Green was joined by Parm Sangha, EMEA Blockchain Practice Leader at IBM and Johannes Kaske, Global Head of Business Solutions at Metaco, a digital asset custody and trading company.
Green began by explaining how digital assets have the potential to revolutionise the way we do business, what we invest in and how we invest in it. From there, he asked what impact digital assets will have on traditional and alternative capital markets.
Digital assets impact on traditional and alternative capital markets
Kaske pointed out that there’s not any common agreement on what digital assets actually are. Green stated that he sees digital assets as anything that doesn’t require a physical, paper document to be produced and stored.
Sangha explained how the shift towards digital assets is already occurring: Coinbase has 103 million users who are investing in cryptocurrencies. The notion of digital assets is coming through in two forms: first, how to pay for things with a digital token, and second how to digitise assets themselves. He explained how performing a transaction using blockchain and digital assets is very simple, but a lot of effort still needs to be put in to ensure it is done in a compliant, responsible manner. What’s more, regulating what’s going on is very difficult.
The panellists agreed that one of the biggest issues is custody of digital assets. This is very different to custody of traditional assets as the digital asset never leaves the blockchain: what moves is the key – the way in which you access the asset. As Kaske explained, “If you lose the private key, you can’t access the asset – it’s still on the blockchain but you can’t use it or sell it. There’s no one who can help you get it back, so custody is crucial”.
According to Kaske, “Regulated firms have a crucial role to play in providing custody services to give investors peace of mind. We anticipate a recentralisation of banks’ core services around three core fields: custody and safekeeping, compliance and risk, and advisory.”
How to reap the benefits of Digital assets
Green then asked how funds should position themselves to be ready for the change and reap the benefits of digital assets.
Sangha’s opinion was that funds need to “Learn it, understand it, appreciate it and begin to apply it. The change is already happening. How you respond is going to be down to how much you know and how much you’ve tested your capabilities. You need to be ready – your board will be asking what all this is that they’re seeing in the press, and you need to give an answer that shows you’re ready to go”.
Kaske believes the learning part should also include understanding what your options are: “Is it direct exposure to cryptoassets or potentially an indirect exposure through the companies involved in them or funds that invest in blockchain or cryptocurrencies? All have different characteristics, risk and return profiles and regulatory implications”.
Mainstream Digital Assets
Greens closing question to the panel asked when they think digital assets will become mainstream?
According to Kaske, “It depends on the region. Germany was one of the first countries to develop a regulatory notion of crypto custody within existing frameworks. It also created electronic securities laws. So Germany has accepted what is going on and provided a framework. But I expect all assets, financial and non-financial, to sit on the blockchain within the next ten years. Things like property, classic cars, even identity”.
Sangha highlighted central bank digital currencies (CBDCs) as an example of how fast digital assets are progressing: “CBCDs are a key area to keep an eye on. The ECB is looking at digital euros – it was going to carry out a two-year consultation but it’s cut it down to one year. In short, digital assets are already here – funds need to decide their strategy within the next 18-24 months, else it will be too late”.
To read the key highlights from the first part of the day click here.
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