Designing risk management for the future of digital assets

On May 11, RFA was a proud sponsor of the AIMA Digital Assets Conference 2023 that took place in New York. The digital asset industry is one that is subjected to continuous change at a colossal pace. According to Statista, revenue within the digital asset sector is expected to ‘show an annual growth rate (CAGR 2023-2027) of 16.15%, resulting in a projected total amount of US$102,700.00m by 2027’. The number of users within the digital assets market is predicted to amount to 994.30m users by 2027. User penetration of such assets is currently at 8.8% in 2023, yet this is expected to rise to 12.5% by 2027.

With expected unprecedented growth, George Ralph, Global Managing Director at RFA explores the future of the digital assets industry. 

Just recently I read in Forbes that digital assets and blockchain technology are transforming the way that the world interacts with money and approaches governance. In a relatively short period of time, this digitally driven ecosystem has grown exponentially. We now operate in a working world whereby companies are able to use digital to have greater access to capital, thus democratising wealth and asset ownership.

Yet the global macroenvironment in 2022 began to drastically deteriorate with the onset of geopolitical unrest, a cost of living crisis and rising interest rates. Such a mix did not bode well with investor appetite for risk assets. Alongside this caution against appetite for risk, 2022 witnessed high profile centralised collapses such as crypto ventures Terra, BlockFi and Celsius. A notable case was the bankruptcy of cryptocurrency exchange FTX.

Whilst this volatile climate proves to be unforgiving, the setbacks are not a reflection of the technology itself. This continues to prove to be promising and many assume that the future of money is digital. One example is Acra Capital, who shared a piece stating that there is a global sentiment that the future of money is cryptocurrency. To evidence this, Colombia announced plans to create a digital currency to make transactions easier for consumers back in 2022.  Forbes published an article earlier in May 2022 echoing a similar belief, detailing that ‘the U.S has a highly developed and widely adopted financial system. Simultaneously, the U.S dollar is a global reserve currency’. These factors are important because it illustrates that the system is fundamentally challenging to disrupt because it is steeped in tradition.

To counter this point, regions that possess less developed financial systems and currencies with greater volatility may in fact have greater capacity to adopt digital assets. Nations that have been experiencing long-term hyperinflation such as  Venezuela and Argentina who have had inflation rates of 114% and almost 79%, respectively in 2022 could benefit from a digital currency.

Needless to say, centralised monetary networks have been feeling the strains of inflation. The International Monetary Fund published a report titled ‘New Directions for Monetary Policy’ in March 2023 detailing how central banks in developed nations are struggling to achieve their goals of inflation and financial stability.

Whilst there is heightened speculation that the future of money is digital, this presents firms with greater challenges, namely with trust and security of data and money. In PwC’s 2023 Digital Assets report, it was expressed that trust is a foundational pillar in a risk management strategy. This is true of both a firm’s operations, their vendors and any counter parties. Firms that are operating as digital natives should look back to traditional finance institutions for designing a risk management strategy. By looking back to traditional firms, firms can design leading practices with regards to controls, governance transparency and data security. For firms that embody a traditional company structure, they should approach their risk management strategy by understanding and mitigating the specific risks that arise out of using digital assets. By doing so, firms can identify a bespoke risk management strategy that is tailored to their operational structure.

Working with an outsourced partner such as RFA can empower firms to do this, being aware of any developments within the sector of both digital assets and cybersecurity, thus ensuring their risk posture remains resilient and strong. If you would like to learn more about how RFA can help your business, contact me here.