With central banks across Asia racing to launch digital currencies, protection of digital assets takes on a whole new level…
Besides the rise of cryptocurrencies such as Bitcoin and Ethereum, the convenience of digital currency for much faster payments and lower cost of cross-border remittance have led to a global ‘digital asset race’.
In many aspects, nations across Asia are leading the race, especially with China and South-East Asia becoming economic and finance powerhouses.
Monetary authorities, central banks and global financial institutions recognize both the benefits and risks, and are investing in governance and compliance while the race rages on.
But what exactly are these digital assets that need protection, what are the risks involved, and what should be done to meet the challenges ahead?
We spoke to Stephen Richardson, Vice President, Head of Product Strategy and Business Solutions, Fireblocks, to understand the issues and to get some answers:
In the digital economy, what are considered digital assets?
Richardson: Digital assets refer to an item of property that has value which has been reflected or stored in a digital form.
In terms of digital assets today, many of these digitized forms of value are being put on the blockchain. The blockchain records multiple transactions reflecting changes in asset ownership, and this has been the main arena in which digital assets have been utilized.
There are really two forms of digital assets, those that are natively digital like Bitcoin and Ethereum (digitized currencies) and those that reflect an underlying physical asset which has been tokenized on the blockchain (e.g. gold, fiat currencies, stocks, bonds, art etc.).
In addition, natively digital assets derive their value from their market utility and use cases for direct use of that asset, while tokenized assets have their underlying value tied to the physical asset they represent.
How should businesses in Asia Pacific derive value from digital assets?
Richardson: There are many interesting use cases around digital assets from tokenization of securities and other financial instruments to the development of stablecoins and payments tokens.
We are seeing several developments in the Asia Pacific region as it relates to digital assets.
The first is the development of Central Bank Digital Currencies (CBDC), as a means of enabling the digitization of traditional fiat currencies. We have seen projects around CBDCs from countries like China (Hong Kong), Singapore, Thailand, Cambodia, and South Korea.
In addition, payments and remittance products utilizing blockchain technology (digital assets) have been a significant area of focus. Within the region we have seen the deployment of pilot programs like Project Ubin and Project Inthanon-LionRock, as well as the deployment of cross-border payments services by financial institutions such as DBS, JP Morgan, OCBC and UnionBank.
What are some key challenges and issues related to digital assets?
Richardson: When it comes to establishing a digital asset business, there are many considerations that a traditional financial institution must evaluate.
The first major item is determining the specific product offering to bring to market, and how best to do so. Whether it is starting with a simple custody use case, enabling trading and brokerage or lending products, understanding the demand and needs from the existing customer base is critical.
Once the use case has been defined, alignment across the organization (from IT to Compliance to Operations) to address the following questions:
- Digital Wallet Security & Infrastructure: with how quickly the blockchain and crypto space moves, understanding the custody landscape and current technology and security protocols is required to properly evaluate solutions. As the custody of digital assets is much different from traditional assets, infosec teams must consider attack vectors and points of compromise to ensure that a wallet and infrastructure solution provides the required multi-layer security, and most importantly private key security to enable enterprise grade scalability of volume, value, and use cases.
- Operational Policies, Controls & Processes: understanding the impacts from the customer interface through internal systems such as compliance, FX, core ledger through to settlement of assets over the blockchain is critical to enabling digital asset products. While existing workflows and integration points can be leveraged, there are unique characteristics to digital assets which must be incorporated for those solutions.
- Market Participation: where does the institution fit within the broader ecosystem, and what partners will be relevant to enable the use case. Examples of this can be Trade Execution Platforms, Liquidity Providers (Exchanges, OTC Market Makers), Lenders, and AML / Compliance solutions.
- Regulatory & Compliance Requirements: educating internal risk and compliance, auditors, and regulators is a key challenge to enabling a digital asset business. With a lot of negative headlines garnering attention in the space, understanding the potential risks, and having a comprehensive and detailed solution that mitigates these risks is paramount.
How could business address these challenges, and what should they take note of particularly?
Richardson: The key to addressing the above challenges is establishing a “Crypto Committee” or working group that is led by an executive stakeholder. This committee should have representation across the organization to ensure that any and all relevant functions have a clear line of sight into all upstream and downstream impacts from a technology, process, and risk perspective.
The goal for this team should be to understand market trends, technology, and types of market participants that would be relevant for the use cases being explored. The most important aspect of leveraging any new technology or market is working closely with regulators to remain compliant – engaging early and often is critical for success.
In the digital asset race in the region, how has the race been progressing?
Richardson: There are a few factors to look at when assessing the digital asset race in the APAC region. One area to explore is the implementation of CBDCs by central banks.
In this space, countries like China (Digital Currency Electronic Payment System) and Cambodia (Project Bakong) are farther along the path of CBDCs and rolling them out in large-scale pilots.
Singapore is another country to watch for several reasons. First, MAS has done quite a bit of work around CBDCs, with their implementation and commercialization around Project Ubin.
Secondly, Singapore has become quite a hub for fintech and digital asset companies due to their clarity around regulation for enterprises engaging in digital asset activity. This regulatory clarity has been extremely beneficial for traditional and non-traditional financial services firms as they evaluate entering or supporting digital assets.
In Thailand, they have just recently announced a renewed focus on launching their CBDC in a larger-scale pilot. Once this is in place, they would clearly be on a similar trajectory like countries Singapore, China, and Cambodia in terms of direct central bank engagement with digital assets.
What should regulators look at to ensure the race doesn’t overheat?
Richardson: From a regulatory perspective, the key is to foster, permit and encourage innovation while still minimizing the risks involved to market participants.
The critical first step for regulators seeking to strike that balance is to engage with the fintech and financial institutions that are already in, or are looking to enter, the digital asset markets.
The ability for the regulators to really understand the emerging business models in the digital asset space – and, importantly, why these models are attractive to their constituents – is critical to developing an appreciation for the role innovation plays in sustaining these markets and attracting new entrants.
The second critical piece is the development of a regulatory framework that promotes transparency and stability for market participants and service providers. Clear conduct rules that are monitored and enforced with consistency by regulators contribute to market integrity, supporting innovation and further driving adoption and growth.
Lastly, for the cycle of engagement and thoughtful regulation to continue, regulators must keep an eye on emerging trends within the digitally native space (e.g., staking DeFi, etc.). In this respect, market participants on the front lines of innovation have a role to play in maintaining this balance by helping regulators understand what innovation is taking place within the digital asset ecosystem and working with them to propose strategies to mitigate the risks inherent in these activities.
