Decentralized Finance May Transform How Money is Managed - WSJ

Barriers to adoption of blockchain technology, digital assets, and tokenization are dissolving, although unevenly around the world, suggesting widespread acceptance of new ways to exchange value may follow

The velocity of money may soon accelerate significantly as blockchain, digital assets, and cryptocurrency enter and begin to proliferate in mainstream market spaces.

Although the industry has had high-profile setbacks, cryptocurrencies have gained significant attention with major commercial entities across sectors and geographies taking steps to plan for, experiment with, pilot, or adopt cryptocurrencies, stablecoins, and tokenized assets. As these assets are programmable, they have the potential to replace certain services that today are provided by intermediaries such as banks, stock exchanges, or brokers. Blockchains, or distributed ledgers, can enable digital assets to be created, stored, and transferred transparently in real-time, immutable transactions across decentralized peer-to-peer networks.

“The scale of exploration suggests more widespread adoption with the potential to disrupt the existing economic framework,” says Lara Abrash, chair at Deloitte US. “To move forward responsibly, it is critical we prudently establish clear governance models to keep transparency, fairness, and accountability at the fore.”

Numerous countries are setting in place regulatory frameworks to permit the use of digital assets within their financial system. That could enable a wide range of transactions for financial institutions, commercial and nonprofit entities, governments, and consumers—managing anything from global treasuries and complex supply chains to payroll, benefits administration, digital rights of intellectual property, taxation, and investment accounts.

Consumers already have options to use stablecoins for a wide variety of retail purchases without involvement of a traditional bank account, credit card, or cash; however, these options are often complex and expensive. In a world where more people may have access to cell phones¹ than bank accounts,² and as the cost and simplicity of access improve, a digitized system of currency may provide people globally with more equitable access.

“Increasing acceptance of tokenization of tangible and intangible assets could transform the way common transactions are carried out for entities, governments, and consumers globally,” says Tim Davis, a principal and global and U.S. Risk & Financial Advisory blockchain and digital assets leader, Deloitte & Touche LLP.

Key aspects of the evolving environment—commercial adoption, regulation, and tokenization, or the process of cryptographically representing assets in digital form—provide context for how the currency and payments landscape may be poised to scale toward critical mass, suggesting organizations may want to consider how they can begin planning and embarking on their own digital asset journeys.

More Brands Are Taking Notice

A growing number of major platforms that form the backbone of the modern global economy are planning for or beginning to consider the potential impact and opportunities associated with cryptocurrency and digital assets, says Davis. “These include major banks and banking networks, card networks, and technology providers who are experimenting with or operating nodes on blockchain networks, or are developing plans to do so,” he says.

With access provided on 428 million active accounts, including 35 million merchant accounts,³ PayPal’s adoption of crypto on its platform represents a significant step in the transformation of how value is exchanged, says Rob Massey, a partner with Deloitte Tax LLP and global and U.S. tax blockchain and digital assets leader. PayPal account holders can buy, hold, and sell some common cryptocurrencies. Account holders can also cash it out to pay for purchases and transfer crypto between eligible PayPal and Venmo accounts as well as other wallets and exchanges.⁴ “PayPal’s adoption of crypto enables a critical component for adoption—access,” says Massey.

In another example, J.P. Morgan has developed and deployed methods for representing traditional assets on blockchains to enable frictionless settlement. Some of the launches to date include JPM Coin System,⁵ a blockchain-based account ledger and payment system, and Onyx Digital Assets,⁶ a multi-asset tokenization platform that enables financial institutions, assets, managers, and fintechs to record and represent financial assets as programmable tokens on a blockchain.

More recently, J.P. Morgan and Apollo Global Management issued a report describing their vision for a tokenized approach to portfolio management—personalized investment portfolios at scale with simplified and streamlined order execution and settlement processes for both traditional and alternative investments.⁷ The system would be powered by blockchain, smart contracts, and the tokenization of assets.

Goldman Sachs has also moved into the digital assets space with trading in cryptocurrencies⁸ and the launch of its own digital asset platform.⁹ Goldman and others such as S&P Global, Moody’s, Broadbridge, and Capgemini have joined Canton,¹⁰ a privacy-enabled open blockchain network that provides connections among entities using smart contract technology. The permissioned blockchain is designed to provide interoperability and control for powering synchronized financial markets to enable secure, controlled exchanges of data and value.

“Blockchain development is progressing at a pace where the technical ability to manage high volumes of transactions globally with the necessary levels of transparency and privacy is becoming more feasible,” says Wendy Henry, the global blockchain and digital assets lead with Deloitte Consulting LLP. “The capability of enterprises, especially financial institutions, to be able to build applications and establish tokenized assets on public networks is a notable development in the evolution of cryptocurrency and digital assets. Although financial institutions are not yet leveraging this capability at scale, it can enable scaling that can lead to more widespread adoption.”

Additionally, as the capabilities of generative AI evolve rapidly, AI platforms could serve as agents performing financial transactions on behalf of people, says Davis. “Digital assets are well suited to AI platforms as money can be moved, controlled, and programmed directly,” he says. “Supercharging the way money is used suggests new risks and benefits, and the rapid acceleration of AI could help accelerate the adoption of digital assets.”

What’s more, platforms such as Bitwave are emerging to provide a connection between blockchain-based technologies and traditional finance.¹¹ Bitwave is a digital asset subledger that feeds into common enterprise resource planning systems to enable programmable money, including payments with vendors, customers, and employees. The platform enables accounting, auditing, and reporting of data captured in distributed ledgers—capabilities that can be critical for scaling adoption.

Another important evolutionary step: the layering of networks over existing networks to aggregate transactions in a way that can improve flow and throughput. Much as high-rise buildings can increase real estate capacity in dense geographies, a layer-two distributed ledger can benefit from the safety and security of the layer-one network it is on while having significantly lower transaction costs and higher throughput. For example, Optimism’s OP Mainnet¹² is an open-source extension of Ethereum, to scale the Ethereum ecosystem.

“As major platforms continue to launch applications, consumer and business acceptance of cryptocurrencies and digital assets is growing rapidly,” says Davis. “These are important indicators that further disruption of currency and payment systems globally is on the horizon.”

Regulation is Evolving Globally

A regulatory framework for digital assets is taking shape in many jurisdictions around the world, says Brian Hansen, an Audit & Assurance partner with Deloitte & Touche LLP and U.S. Audit & Assurance Blockchain and Digital Assets leader. The Group of 20’s Financial Stability Board and International Monetary Fund provided comprehensive guidance for how authorities can address the macroeconomic and financial stability risks posed by crypto-asset activities and markets. The European Union’s Markets in Crypto-Assets Regulation adopted in June 2023 provides rules for crypto-assets that are not otherwise regulated in existing financial services legislation. And Hong Kong’s securities commission issued regulations on tokenized assets, stablecoins, and crypto trading.

Approximately 130 jurisdictions globally are either launching, piloting, developing, or researching central bank digital currencies (CBDCs),¹³ although U.S. regulators are still in early stages of conceptualizing a U.S. CBDC. California also adopted two bills to establish a virtual currency licensing regime and to regulate digital financial asset transactions.

At the federal level in the United States, the regulatory tone has been different as risks and volatility in cryptocurrencies have prompted added scrutiny on several fronts. The Financial Stability Oversight Council issued a report finding that connection points between digital assets and traditional finance could pose systemic financial risk and urging federal agencies to continue to enforce existing rules and regulations.

In a significant development for U.S. markets, the Securities and Exchange Commission approved the listing and trading of several spot bitcoin exchange-traded funds, clearing a path for mainstream investment in bitcoin in traditional brokerage accounts via these approved funds. From a reporting standpoint, the Financial Accounting Standards Board has developed guidance on how companies would account for cryptocurrency and other digital assets under GAAP. The Internal Revenue Service has also developed guidance on digital assets, treating them as property for federal tax purposes. Meanwhile, banking regulators are urging financial institutions to exercise caution.

Tokenization is Taking Shape

As technology adoption and regulation continue to evolve, the global financial ecosystem is moving closer to becoming a token-based economy—one in which assets are represented in digital form on blockchains and the exchange of value is decentralized, says Davis.

Nonfungible tokens have already gained attention in certain niche areas such as sports and art, but blockchain technology and the evolving regulatory environment can support tokenization for a much broader variety of tangible and intangible assets with an understanding of the risks. These assets can include securities, loans, public and private funds, hedge funds and money markets, private equity, environmental credits, real estate, commodities, ownership rights, voting rights, and content licensing. Items of value can be converted using encoded rule sets and attestations, and they can be transacted over blockchains to significantly improve efficiency and transparency.

“Tokenization provides many potential benefits that are becoming increasingly compelling,” says Massey. “Consider the typical costs and friction associated with a transaction, such as a commercial loan, and how tokenization and management of value through a distributed ledger could enhance the process.” Using smart contracts and other automation tools, tokens could be coded so that they would execute, clear, and settle virtually instantaneously. The process could be faster and less costly while providing around-the-clock access and enhanced transparency.

Digital assets and tokenization could help companies better manage trapped cash on their balance sheets. “It could enable them to explore new ways of facilitating cross-border payments, repatriating cash, and improving work capital management,” says Massey. “It could significantly enhance payroll processes, providing a way to compensate people on a more ongoing or recurring basis, such as per job for gig workers or per day for salaried workers. Tokenization could streamline many of the traditional banking processes by reducing settlement time and cost.”

Ultimately, tokenization could lead to a system of programmable money, where value is built into smart contracts, and terms and conditions are coded in, says Henry. “Even without third parties intermediating transactions, companies could see dramatic improvements in cost, efficiency, and transparency, which could dramatically transform how they handle finance and treasury functions,” she says.

As an example of the potential benefits, consider the friction normally involved in cross-border payments, which are subject to layers of process, regulatory scrutiny, and cost. With tokenization and programmable money, transactions can be executed instantly, anytime, and from anywhere. They can be automated based on certain triggering events, with transparency and control built in. Rather than having funds tangled up in payment channels, they can be deployed under working capital strategies and tapped at the moment needed.

Taking Action

“While there are still regulatory uncertainties regarding how a system of decentralized finance may unfold, many organizations see the potential benefits of such a system, prompting a growing number of organizations to launch or consider launching their own digital asset strategies,” says Abrash. “Companies can consider many different possible pathways to planning and embarking on their own digital asset journeys.”

Form a cross-functional group. 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 spaces and consider opportunities and risks.

Understand blockchain and Web3. Learn how the enterprise could benefit from a transformed method for sharing and validating data, one that provides a transparent, immutable record of transactions without an intermediary. Consider possible use cases where accountability and auditability are important and where data needs to be accessible and transparent to multiple parties who are operating at arm’s length.

Consider possible uses of crypto. Despite significant volatility and high-profile failures in the cryptocurrency markets, maturity is developing as people become more familiar and exercise more discipline and rigor. Companies can consider opportunities to invest, buy, sell, hold, and take or make payments using cryptocurrencies after significant effort, analysis, planning, and execution with respect to risks and opportunities, rules and regulations, and processes and controls.

“As the cryptocurrency and digital asset spaces evolve, barriers to entry and scale are gradually falling away,” says Massey. “The global economy is moving closer to widespread adoption of these new ways of doing business.” When cryptocurrency and digital assets become easier to access and transact than fiat currencies and traditional processes allow, organizations may witness a groundswell of adoption that transforms the way value is exchanged.

—by Tammy Whitehouse, senior writer, Executive Perspectives in The Wall Street Journal, Deloitte Services LP

1. “Charted: There are more mobile phones than people in the world,” Word Economic Forum, April 11, 2023.

2. “COVID-19 Boosted the Adoption of Digital Financial Services,” The World Bank, July 21, 2022.

3. PYPL Q3-23 Investor Update (q4cdn.com)

4. PayPal Cryptocurrency FAQs

5. Coin Systems | Onyx by J.P.Morgan (jpmorgan.com)

6. Onyx Digital Assets | Onyx by J.P.Morgan (jpmorgan.com)

7. “The Future of Wealth Management,” Onyx and Apollo, 2023.

8. SEC FORM D/A

9. Goldman Sachs’ Tokenization Platform GS DAPTM, Leveraging Daml, Goes Live | Business Wire

10. Introducing the Canton Network

11. Deloitte-Bitwave Strategic Alliance Revolutionizes Digital Asset Accounting and Compliance (prnewswire.com)

12. Optimism

13. Central Bank Digital Currency Tracker – Atlantic Council

Published on Feb 7, 2024 at 1:00 PM

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Barriers to adoption of blockchain technology, digital assets, and tokenization are dissolving, although unevenly around the world, suggesting widespread acceptance of new ways to exchange value may follow

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