Digital assets TOM: how financial institutions embed digital assets in their line organizations

Number of institutions running digital assets pilot projects is rising rapidly!

The increasing digitalization of the financial markets has led to rapid growth in the digital assets sector in recent years. Digital assets and blockchain technology have the potential to fundamentally change the financial system. According to the latest zeb.Digital Assets Study, over 70% of survey participants expect distributed ledger technology (DLT) and digital assets to have a significant transformative impact on their institutions’ business.

The number of institutions running digital assets pilot projects is currently rising rapidly, and competition among regulated institutions is becoming increasingly fierce. Accordingly, numerous players in the DACH region have started to develop the necessary systems and expertise and have entered the market with their own offerings. Due to the novelty and potential of digital assets, banks and asset managers often assign responsibility for the topic to stakeholders from various divisions. As a result, knowledge, infrastructure and capacities within organizations are often highly fragmented.

In order to pool their knowledge, leverage change and run synergies, and ensure a centralized coordination, they are well advised to set up dedicated digital assets business units. This gradual transition towards a line organization is currently becoming increasingly important, as more and more market participants have completed pilot projects and are now aiming for the mass market. Nevertheless, it will still be necessary to have decentralized expertise in the digital assets business, e.g. when it comes to developing use cases based on input from customers and the market.

Why is an overarching collaboration model essential for the digital assets business?

Depending on the business model, the dedicated digital assets business units may, for example, be responsible for setting up and operating relevant systems, issuing digital assets products or providing relevant services. Since the digital assets business affects the entire value chain, banks involve many of their divisions in their DA-related activities.

For example, appropriate solutions need to be developed for tokenization in the issuing business or wallets in custody. New processes and roles are also needed at the customer interface, in the back office and in IT. In addition, it is often necessary to integrate solutions from external providers and to take into account regulatory and cultural aspects.

Due to the large number of divisions involved and the high complexity of some processes, it is essential to set up digital assets business units in a holistic manner. In addition, the aforementioned, often necessary mix of centralized and decentralized expertise makes the organization of the digital assets business particularly challenging. Accordingly, institutions should develop a target operating model (TOM) for their digital assets business that regulates cross-divisional collaboration on the topic. The main pillars of such a model should be technology, organization and regulation.

What aspects need to be considered when setting up an operating model for the digital assets business?

Figure 1: Elements of the target operating model for the digital assets business

Technological infrastructure: The DLT-based digitalization of the capital market value chain requires new infrastructure components, e.g. for tokenization platforms or the custody of digital assets. Institutions aiming to build a scalable and secure infrastructure in order to prevent sunk costs should consider the following technology-related aspects:

• Selection of components: Since the technical components used have a significant impact on performance as well as the potential product range and compatibility with other (DLT) systems, they should be selected using a particularly well-thought-out approach. In particular, the components should enable the intended offering, operate effectively and scalably and be integrable with the rest of the infrastructure to allow for a modular architecture. This concerns, for example, the selection of solutions for tokenization, custody and transfer of digital assets.
• IT architectural design: DLT components should never be considered in isolation, as compatibility plays a significant role in the scalability of the system and thus, by extension, the business itself. A holistic and forward-looking target state for the overarching IT architecture of the DLT business should therefore be developed at an early stage. In this context, it is of particular importance to also take the existing architecture into account, as many institutions still use legacy systems, e.g. at the customer interface or in portfolio management. Accordingly, a comprehensive interface and integration concept should also be fleshed out. Furthermore, new security concepts need to be developed for the digital assets business, as – unlike with conventional securities – some types of digital assets such as cryptos could be irretrievably lost in the event of theft, for example. Such a security concept may include physical storage media to be used in emergencies in addition to digital ones.
• Decision regarding sourcing: When deciding whether to develop technical components for the digital assets business internally or procure them from external providers, it is important to consider the compatibility of third-party solutions with existing systems in addition to costs and development time. This is essential to ensure integrability with the overarching digital assets ecosystem. Due to the fast time-to-market and the greater experience of external providers, the use of third-party solutions is usually the preferable solution. In view of the high level of interaction and possible lock-ins, it is crucial to carry out a structured and comprehensive procedure for provider selection.

Organization and governance: To ensure effective operation of the digital assets business, a detailed concept of the target organization is of the essence. What makes this business special is that the selected technical solution can have a significant impact on functions and processes. So, we can conclude that, at least to some extent, “organization follows tech”. The first step should therefore be to develop at least a rough target image for the envisaged technical solution before the concrete target organization is designed. The following aspects are often highly relevant when developing the target organization:

• Integration in the organizational structure: The first step is to define the relevant activities and processes, as well as the roles and functions required to perform these activities. This can include operational roles in the middle and back offices as well as control functions such as relevant product owners. Depending on the envisaged business model and the existing organizational structure, there are various ways to integrate the unit – for example, as an independent department or as part of an existing business unit. However, it is important that clear responsibilities are assigned and that skills and activities are pooled wherever possible.
• Development of the process organization: The next step is to define processes for the functions developed in step one. These processes can be derived, in particular, from various activities, namely the functional and technical activities for creating and processing products, any relevant activities at the customer interface as well as control and support activities. In order to create a scalable infrastructure for the digital assets business, the design of new processes should ideally follow a modular approach. When it comes to tokenization, for example, this can be achieved by connecting an EVM-compatible tokenization solution via an API and using token templates. This allows numerous token products to be created with a similar process that can be easily embedded in front-office processes and allows for the use of standard custody solutions.
• Establishing committees: In addition, overarching committees should be set up for coordinating and monitoring digital-assets-related initiatives in order to ensure a coherent and uniform strategy. Fundamental decisions on digital assets ought to be made centrally by such committees wherever possible. This is particularly important in order to maintain transparency across all digital assets-related initiatives and to ensure a uniform and targeted approach.

Regulation and risk management: A robust framework for compliance with all relevant laws and regulations is essential, as the digital assets sector is dynamic and complex. The aim is to take a minimally invasive approach and ensure the right balance of pragmatism and security. The following considerations should be made in this context:

• Selecting the license model: The first step is to define which services are to be provided under which regulatory framework and with which license. This can include, for example, the crypto securities register pursuant to the Electronic Securities Act (eWpG) or crypto custody pursuant to MiCAR. In order to be allowed to do business, companies can then decide to either apply for licenses themselves or use licenses provided by third parties. Although this decision should be made case by case, it is generally advisable for institutions to hold all the necessary licenses themselves in order to control as much of the value chain as possible.
• Ensuring compliance: In order to be allowed to conduct business under the envisaged license model, the operational model has to consistently meet the corresponding regulatory requirements,  including those pertaining to KYC, as well as, for example, transaction monitoring (KYT), e.g. for compliance with the Travel Rule. To this end, the institutions need to establish relevant functions or design a regulatory-compliant organizational structure, among other things. Regulated institutions already cover the majority of these requirements with their existing organization. They should therefore conduct a gap analysis in order to identify possible gaps and close them in a targeted manner.
• Adjusting risk management: In order to effectively identify, measure and manage new risks in the digital assets business, the risk management approach must be adapted. Moreover, appropriate measures to mitigate relevant risks must be defined and implemented.

zeb has already supported numerous institutions in designing and implementing operating models for their digital assets business. We use our expertise on digital assets and capital market topics as well as on organizational development to create and establish effective and sustainable organizational structures. If you need any help in that regard, feel free to reach out to our experts.