Blockchain opportunities for treasury – disruptive solutions or additional risks?

There is no doubt that the current macro and microeconomic environment means increased focus on interest rates and inflation and subsequently treasury and liquidity management have risen in the priority list for businesses. As part of technology transformation, the digitisation of assets (tokenisation and programmable assets) and adoption of enterprise grade blockchains have created a multitude of opportunities to create new processes, services, and business models. There are several use cases for blockchain solutions that facilitate fast, cheap and more optimal business processes for managing liquidity.

The implications of this new technology, ranging from new markets for intraday swaps and liquidity to new products and asset classes should be at the forefront of all Treasurer’s minds. In this piece, we seek to analyse the benefits of blockchain implementation, versus the risks of eliminating the technology from your strategy.

The solution to legacy challenges?

There are many Web 3 technologies that have the potential to hold benefits for adopters in financial services. We take a look at a few of these in our article on how Web 3 is impacting investment banks, specifically bond issuance, intraday liquidity and in OTC derivatives.

For banks and their treasury departments the use cases of particular interest include being able to see and manage transactions in real-time and more efficiently, via intra-day repo or FX products. This allows more precise forecasting, and faster access to liquidity, which can consequentially reduce cost of liquidity held due to poor data quality or poor analysis. Moreover, these use cases can also reduce operational costs and risks, as the complexity and costs of transactions can be reduced.

As markets and products have become increasingly complex, daily liquidity needs have become more fragmented into different pools, resulting in poor visibility of funds and exposures, ultimately making hedging and risk management more difficult. In addition, operational inefficiencies arising from legacy data processing, disjointed data points and a need for manual adjustments adversely affect analytical clarity in payments, settlements, and clearing. This has made reconciliation processes far more challenging and prone to errors. Therefore, reduction in treasury and liquidity infrastructure costs, as well as improving analytics, present an impactful opportunity for Web 3 solutions.

How blockchain could help

Given this potential disruption of banking infrastructure, established institutions as well as FinTech start-ups are developing and entering the market, offering a breadth of innovative solutions to challenge legacy processes which address the inefficiencies of an increasingly complex ecosystem. The enticing potential of blockchain technologies allows institutions to reduce liquidity fragmentation and improve revenue generation and capital efficiency by making/receiving payments in real-time from other participants on the same network. This enables them to monitor cashflows, access liquidity in real-time, optimise forecasting and effectively manage risk in a fully transparent fashion.

What risks do these technologies bring?

There are caveats to these solutions, ranging from costly and time intensive adoption, implementation challenges, an immature regulatory environment, cyber security risks and the potential emergence of further forms of liquidity fragmentation being driven by the sheer number of new entrants into the market.

In a challenging economic setting, the decision of whether to invest in blockchain technologies or not is of significant strategic importance, especially to well-established institutions. With specific use cases being better understood and technologies themselves maturing at a fast pace, institutions need to be smart in their management of the costs for research, development, acquisitions, and implementations. Getting it wrong could cost businesses their competitive edge relative to disruptive FinTechs and key competitors.

The increasing competition amongst market players offering solutions in this space creates a new source of liquidity fragmentation risk. This arises from competitors’ solutions potentially being siloed on a particular infrastructure and a lack of interoperability of platforms or markets. This form of liquidity fragmentation is more commonly discussed in the context of blockchain interconnectivity and interoperability.

Banks and treasurers considering whether to adopt these new technologies need to have a full view of all the risk factors, such as the aforementioned liquidity fragmentation risk, cyber risk and the cost of adoption of these technologies into their reporting and analytical ecosystem. Whilst we expect interoperability to increase, fragmentation to reduce, cyber risk to reduce, costs of integration to reduce and the regulatory environment to mature as the technologies move past their embryonic stages, decision makers need a rounded view of the risks so informed decisions on adoption that fits their own risk profiles can be made.

Have you considered what this means to your organisation?

There are many benefits to reap by implementing blockchain technologies, ranging from applications in real-time payments and settlements, more accurate forecasting, better risk mitigation methods, improved capital management and higher transparency. However, there are also considerable risks that will be unique to each business and decision makers should closely monitor how the current ecosystem evolves so they can prepare for future challenges, such as liquidity limitations and the regulatory environment, that may arise.

Now is the time for financial institutions and their treasury functions to overcome legacy thinking, culture, and architecture and to fully utilise the value of innovative blockchain-based solutions.

If you would like to learn more about evolving your technology strategy, understanding the regulatory initiatives, or developing your treasury operations, please contact us.