Source: The Wall Street Journal
By Tammy Whitehouse
Compiled by: BitpushNews Mary Liu
As blockchain, digital assets , and cryptocurrencies enter mainstream markets and gain mass adoption, the velocity of money is likely to accelerate significantly.
Despite some scandals in the industry, the concept of cryptocurrency itself has attracted widespread attention, with large business entities across industries and regions taking steps to plan, experiment, pilot or adopt cryptocurrencies, stablecoins and tokenized assets.
Crypto assets are programmable and they have the potential to replace some of the services currently provided by intermediaries such as banks , stock exchanges or brokers. Blockchain or distributed ledgers can transparently create, store and transfer digital assets in real-time, immutable transactions across a decentralized peer-to-peer network.
Once the “disruptive” revolution comes, the way traditional financial markets operate will be rewritten.
Lara Abrash, head of Deloitte US, said: "The scale of current industry exploration suggests that crypto adoption will be more widespread and has the potential to disrupt the existing economic framework. To move forward responsibly, we must carefully establish clear governance models to maintain transparency, fairness and accountability."
Many countries are developing regulatory frameworks to allow the use of digital assets in their financial systems. This can enable financial institutions, commercial and non-profit entities, governments and consumers to conduct many transactions - everything from cross-border bookkeeping and complex supply chains to payroll, benefits administration, digital rights to intellectual property, taxes and investment accounts.
Consumers already have the option to use stablecoins for a variety of retail purchases without having to use traditional bank accounts, credit cards, or cash; however, these options are often complex and costly. In some countries where more people may have mobile phones than bank accounts, a digital currency system could provide more equitable access to people around the world as it becomes more affordable and convenient.
“The growing acceptance of tokenization of both tangible and intangible assets has the potential to transform the way global entities, governments and consumers conduct common transactions,” said Tim Davis, principal and global and U.S. risk and financial advisory blockchain and digital asset leader at Deloitte & Touche LLP.
The evolving landscape — of commercial adoption, regulation and tokenization, or the process of representing assets in digital form — provides the context for how the money and payments landscape can scale to critical mass, suggesting that companies may have to start thinking about how to plan and embark on their own digital asset journeys.
More and more brands are starting to pay attention
Davis said that more and more major platforms that form the backbone of the modern global economy are planning or beginning to consider the potential impact and opportunities brought by cryptocurrencies and digital assets.
“These include mainstream banks and banking networks, credit card networks, and technology providers that are either experimenting with or operating blockchain network nodes or are developing plans to do so,” he said .
Rob Massey, partner at Deloitte Tax and global and U.S. tax blockchain and digital assets leader, said that PayPal has access to 428 million active accounts, including 35 million merchant accounts, and PayPal's adoption of cryptocurrencies on its platform represents an important step in the transformation of value exchange. PayPal account holders can buy, hold and sell some common cryptocurrencies. Account holders can also cash them out to pay for purchases and transfer cryptocurrencies between eligible PayPal and Venmo accounts and other wallets and exchanges.
“PayPal’s adoption of cryptocurrency provides a key element to adoption — access,” Massey said.
As another example, JPMorgan Chase has developed and deployed methods to represent traditional assets on blockchains to enable frictionless settlement. Some of the products launched so far include the JPM Coin System (a blockchain-based account ledger and payment system) and Onyx Digital Assets (a multi-asset tokenization platform) that enables financial institutions, assets, managers, and fintech companies to record and represent financial assets as programmable tokens on blockchains.
Recently, JPMorgan Chase and Apollo Global Management released a report describing their vision for a tokenized portfolio management approach that would personalize portfolios at scale and simplify the order execution and settlement process for traditional and alternative investments. The system would be powered by blockchain, smart contracts, and asset tokenization.
Goldman Sachs has also entered the digital asset space, conducting cryptocurrency trading and launching its own digital asset platform. Goldman Sachs and companies such as S&P Global, Moody's, Broadbridge and Capgemini have joined Canton, a privacy -enabled open blockchain network that uses smart contract technology to provide connections between entities. Permissioned blockchains are designed to provide interoperability and control to support synchronized financial markets and enable secure, controlled data and value exchanges.
“Blockchain is evolving at a rapid pace, and the technological capabilities to manage large volumes of transactions around the world with the necessary levels of transparency and privacy are becoming increasingly feasible,” said Wendy Henry, global blockchain and digital assets leader at Deloitte Consulting LLP. “The ability for businesses, especially financial institutions, to build applications and tokenize assets on public networks is a notable advancement in the evolution of cryptocurrencies and digital assets. While financial institutions have yet to leverage this capability at scale, it could scale to enable broader adoption.”
Furthermore, with the rapid development of generative AI capabilities, AI platforms can act as agents to conduct financial transactions on behalf of humans.
"Digital assets are well suited to AI platforms because funds can be directly transferred, controlled and programmed," Davis said. " Enhancing the way funds are used means new risks and benefits, and the rapid development of AI may help accelerate the adoption of digital assets."
Additionally, platforms such as Bitwave are emerging to provide a bridge between blockchain-based technologies and traditional finance. Bitwave is a digital asset ledger that feeds into common enterprise resource planning systems to enable programmable money, including payments to suppliers, customers, and employees. The platform supports accounting, auditing, and reporting on data captured in the distributed ledger—functions that are critical to expanding adoption.
Another important evolutionary step: layering networks on top of existing networks to aggregate transactions in a way that can increase traffic and processing speed. Just as tall buildings can increase real estate capacity in dense areas, second-layer distributed ledgers can benefit from the security of the first-layer networks they are built on while significantly reducing transaction costs and increasing processing speeds. For example, Optimism 's OP Mainnet is an open source extension of Ethereum for expanding the Ethereum ecosystem.
“Consumer and business acceptance of cryptocurrencies and digital assets is growing rapidly as platforms continue to launch applications,” Davis said . “These are important indicators that the global monetary and payment systems are about to be further disrupted.”
Global regulation is evolving
Brian Hansen, audit and assurance partner at Deloitte, and head of blockchain and digital assets for audit and assurance in the United States, said that regulatory frameworks for digital assets are being formed in many jurisdictions around the world. The Financial Stability Board of the Group of Twenty and the International Monetary Fund have provided comprehensive guidance on how authorities should respond to macroeconomic and financial stability risks posed by crypto asset activities and markets. The Crypto Asset Market Regulation, adopted by the European Union in June 2023, provides rules for crypto assets that are not regulated in existing financial services legislation. The Securities Commission of Hong Kong has issued regulations on tokenized assets, stablecoins and crypto transactions.
About 130 jurisdictions around the world are launching, piloting, developing or researching central bank digital currencies (CBDCs), although U.S. regulators are still in the early stages of conceptualizing a U.S. CBDC. California has also passed two bills to establish a virtual currency licensing system 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 increased government scrutiny on multiple fronts. The Financial Stability Oversight Council released a report that found that the connection points between digital assets and traditional finance could pose systemic financial risks and urged federal agencies to continue to enforce existing rules and regulations.
The U.S. Securities and Exchange Commission ( SEC ) has approved several spot Bitcoin ETFs for listing, a major development for the U.S. market that paves the way for people to invest in Bitcoin in traditional brokerage accounts.
From a reporting perspective, the Financial Accounting Standards Board has developed guidance on how companies can account for cryptocurrencies and other digital assets under GAAP. The IRS has also developed guidance on digital assets, treating them as property for federal tax purposes. At the same time, banking regulators are urging financial institutions to be more aware of risks.
Tokenization is taking shape
Davis said that as technology adoption and regulation continue to evolve, the global financial ecosystem is moving closer to a token-based economy, in which assets are presented in digital form on the blockchain and value exchange is decentralized.
Non-fungible tokens (NFTs) have already gained traction in specific sectors such as sports and art, but blockchain technology and the evolving regulatory environment can support the tokenization of a wider range 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, voting rights, and content licenses. Valuable items can be transformed using encoded rule sets and proofs, and can be traded over the blockchain to significantly increase efficiency and transparency.
“Tokenization offers many potential benefits that are becoming increasingly compelling,” said Massey. “Consider the typical costs and frictions associated with a transaction, such as a commercial loan, and how tokenization and value management via a distributed ledger can improve the process.” Using smart contracts and other automated tools, tokens can be coded so that they can be executed, cleared, and settled almost instantly. The process can be faster and cheaper while providing 24/7 access and enhanced transparency.
Digital assets and tokenization can help companies better manage stranded cash on their balance sheets.
“It can enable them to explore new ways to facilitate cross-border payments, repatriate cash and improve working capital management, ” Massey said. “It can significantly improve payroll processes, providing a way to compensate employees on an ongoing or recurring basis, such as gig workers being paid by the hour or by the day. Tokenization can streamline many traditional banking processes by reducing settlement times and costs.”
Ultimately, tokenization could lead to a system of programmable money, where value is embedded in smart contracts and terms and conditions are encoded, Henry said. “Even without a third party mediating transactions, companies could see significant improvements in cost, efficiency and transparency, which could dramatically change the way they handle their accounting and finance functions,” she said .
For example, think about the friction often associated with cross-border payments, which require going through layers of processes, regulatory scrutiny, and costs. With tokenization and programmable money, transactions can be executed instantly, anywhere, at any time. They can be automated based on certain trigger events, with built-in transparency and control. Rather than being entangled in payment rails, funds can be deployed based on working capital strategies and used when needed.
How to take action
“While there is still uncertainty among regulators about how the decentralized financial system will develop, many organizations see the potential benefits of such a system, prompting more and more organizations to launch or consider launching their own digital asset strategies,” said Abrash. “Companies can consider a number of different paths to plan and embark on their own digital asset journey.”
Assemble a cross-functional team. Assemble a team from across the business (finance, treasury, accounting, technology, legal, risk, tax, compliance, operations, supply chain, HR, and marketing) to explore what is happening in the crypto and digital asset space and consider the opportunities and risks.
Learn about blockchain and Web3. Learn how businesses can benefit from a transformed approach to data sharing and verification that provides a transparent, immutable record of transactions without intermediaries. Consider possible use cases where accountability and auditability are important, and data needs to be open and transparent to multiple parties at arm’s length.
Consider possible uses for cryptocurrencies. Despite high volatility and a history of major failures, the cryptocurrency market is maturing as people become more familiar with cryptocurrencies and become more disciplined and rigorous. After considerable effort, analysis, planning, and execution in terms of risks and opportunities, rules and regulations, and processes and controls, companies can consider opportunities to invest, buy, sell, hold, and receive or make payments using cryptocurrencies.
“As the cryptocurrency and digital asset space grows, barriers to entry and scale are disappearing. The global economy is moving toward widespread adoption of these new ways of doing business,” said Massey. “When cryptocurrencies and digital assets become easier to acquire and trade than fiat currencies and traditional processes, the market is likely to see a wave of adoption that changes the way value is exchanged.”
