Digital Assets in Treasury: Insights from Noah Herman at Fortris
In the dynamic finance sector, digital assets are revolutionizing the game. Traditionally, this field relied on standard financial tools. Now, blockchain-based assets are ushering in a new era. In this transformative landscape, individuals like Noah Herman, Chief Revenue Officer at Fortris, are at the forefront. Noah’s expertise, shaped by his tenure as Director of Treasury Services at Circle, brings invaluable insights into this new era of finance.
This article dives into the impact of digital assets on treasury operations. It offers a close look at the integration challenges and benefits of these assets in business, drawing on Noah’s expertise and experiences at Fortris. We discuss stablecoins, blockchain technology’s role in transactions, and its advantages for corporate treasuries.
Digital assets are more than a financial innovation; they mark a pivotal change in business financial management. This article reveals the intricate details of this exciting digital finance world, offering an enlightening perspective.
What is a Digital Asset?
Noah Herman demystifies the concept of digital assets. Broadly speaking, digital assets are digital versions of traditional assets recorded on blockchain technology. The simplest form of a digital asset is a stablecoin, like a digital dollar. Here, a physical currency, such as the U.S. dollar or euro, is deposited in a bank, and in parallel, a digital variant of that currency is created and maintained on the blockchain. This process results in a digital asset that mirrors the properties of the original currency but exists in a digital space.
Key Characteristics of Digital Assets
- On-Chain Representation: Digital assets exist on a blockchain as a distributed ledger. This feature ensures a secure and immutable record of transactions.
- Variety and Evolution: Starting from simple concepts like stablecoins, the digital asset ecosystem has expanded to include various forms such as Bitcoin, Ethereum, NFTs, and even digitized real-world assets like art or real estate.
- Distributed Ledger Technology: Using blockchain technology in digital assets offers a decentralized approach to recording and verifying transactions.
- Stablecoins: A notable category of digital assets, stablecoins aim to replicate the stability of traditional currencies, particularly the U.S. dollar, on the blockchain.
Simplifying the Concept
Simply put, if you have $1 displayed in your bank app, that’s a digital representation of a physical banknote. A digital asset does the same, but it exists on the blockchain. This technological shift introduces a new ledger system that is different from traditional banking systems.
Beyond Cryptocurrency
Digital assets extend beyond just cryptocurrencies. They encapsulate any form of digital representation of real money or assets. This concept began with mobile banking, allowing people to manage money digitally, and has evolved to include a wide array of assets represented on blockchain networks.
Advantages of Stablecoins in Asset Management
Noah Herman offers insightful perspectives on using stablecoins and digital assets in asset management, highlighting their advantages over traditional assets.
Efficiency in Cross-Border Transactions
Stablecoins revolutionize cross-border payments by simplifying transactions and reducing costs. In traditional banking, sending money across borders is complex, costly, and slow. This process becomes almost instantaneous with digital assets like stablecoins, involving fewer intermediaries and significantly lower transaction fees.
The Chain Mechanism Simplified
The blockchain, or ‘the chain,’ is the underlying technology of digital assets. In simple terms, it’s a network of computers (nodes) that record transactions in a secure, encrypted manner. This distributed ledger technology ensures that money movement is transparent, secure, and efficient. Each transaction is recorded and verified across multiple nodes, providing a decentralized system that reduces the risk of failure and manipulation.
Practical Use Cases for Businesses
For businesses, especially those operating internationally, digital assets offer substantial benefits. Consider a multinational company headquartered in one country with subsidiaries worldwide. Transferring funds between these entities using traditional banking methods involves numerous intermediaries and layers of complexity.
The process is streamlined with digital assets: the headquarters can transfer funds directly to a subsidiary’s digital wallet on the blockchain. This transaction is fast, cost-effective, and eliminates the need for complex reconciliations.
Challenges and Future Outlook
While digital assets offer numerous advantages, there are still challenges, particularly in retail use and complete integration into the global financial system. The ‘last mile problem’ describes the difficulty of converting digital assets into physical goods or local currency in areas without adequate infrastructure. Additionally, for widespread corporate adoption, entire supply chains must embrace digital currencies.
Cost of Using Blockchain Technology for Transactions
Noah Herman sheds light on the financial aspects of using blockchain technology for transactions, highlighting its cost-effectiveness compared to traditional banking methods.
Gas Fees: The Primary Cost in Blockchain Transactions
- Definition: Gas fees are the main costs associated with blockchain transactions.
- Variability: These fees fluctuate based on network traffic at the time of the transaction.
- Comparison with Traditional Fees: Gas fees are usually much lower than traditional banking transaction fees, often only a fraction of a percent.
Comparing Blockchain with Traditional Banking Costs
Blockchain transaction costs are substantially lower when compared to traditional banking methods like SEPA transfers. Traditional methods can charge a significant fee, either a fixed amount or a percentage of the transaction. In contrast, even when variable, blockchain fees are notably lower, particularly in high-volume or high-value transactions.
The Inherent Cost of Blockchain Transactions
The cost of moving digital assets on the blockchain is minimal, starkly contrasting the operational and technological expenses of traditional banking systems. The decentralized nature of blockchain eliminates the need for intermediaries, reducing costs significantly and streamlining the transaction process.
The Role of Node Validators in Blockchain
Node validators are crucial in the blockchain network. They are responsible for:
- Validating Transactions: This network of globally distributed computing systems checks and approves transactions.
- Security and Authenticity: Their validation ensures the security and authenticity of each transaction before it is permanently recorded on the blockchain.
Blockchain as an Advanced Financial Ecosystem
Blockchain technology surpasses the traditional concept of a payment rail. It is an advanced ecosystem combining payment methods with asset management. This technology creates a self-contained financial environment, offering a unique alternative to traditional systems like SWIFT. Blockchain serves not only as a means of transferring assets but also as a platform for these assets to be utilized effectively.
Transforming Treasury Operations with Digital Assets
Noah Herman provides a detailed insight into how digital assets transform treasury operations, focusing on efficiency and potential growth.
Integrating Digital Assets into Balance Sheets
The case of MicroStrategy can exemplify the utilization of digital assets in treasury operations. This company, recognized as a major Bitcoin holder, has shifted its holdings from traditional U.S. dollars to Bitcoin. This strategic move illustrates a treasury use case where digital assets are held for potential appreciation rather than immediate operational needs.
While the example of MicroStrategy is somewhat extreme, it highlights the growing interest in digital assets as a diversification strategy. He suggests that, while investing a substantial portion of a balance sheet in Bitcoin might not suit everyone, allocating a smaller percentage could offer diversification benefits and the potential for asset appreciation.
Addressing Volatility in Treasury
The volatility of digital assets like Bitcoin is a double-edged sword. It presents risks due to its fluctuating value but also offers opportunities for significant growth. Treasurers must balance these factors when considering digital assets for their balance sheets. He acknowledges the concerns related to volatility but also points out the potential for these assets to act as a ‘rocket engine’ for a portfolio.
Advantages of Automating Treasury Operations with Digital Assets
One of the primary benefits of incorporating digital assets into treasury operations is the significant reduction in manual processes. This automation eliminates the need for extensive third-party involvement, particularly from banks, making transactions faster and more efficient. Digital assets allow for instant and accurate transactions, reducing the time and costs associated with traditional banking methods.
Moreover, Noah highlights that the real value for businesses, especially large corporations like Amazon, lies in the simultaneous movement of money and messages. This synchronization means there are no uncertainties or delays in transactions, which is often the case with traditional banking systems. This efficiency can lead to cost savings, as companies no longer need to resort to complex financial products like futures contracts to hedge against uncertainties in cash flow.
Digital Assets Resolving Treasury Challenges
Noah Herman elaborates on how digital assets are solving critical challenges in treasury management, focusing on the issues of cutoff times and trapped cash.
Eliminating Cutoff Times and Time Zone Concerns
In traditional treasury operations, treasurers often face the challenge of cutoff times and time zone differences, which can delay transactions and impact cash flow management. Digital assets solve this problem by enabling transactions anytime, regardless of time zones or traditional banking hours. This capability is particularly beneficial for managing settlements and ensuring efficient cash flow.
Case Study: Trapped Cash Problem
Noah provides a practical example of how digital assets can address the issue of trapped cash, a common problem for multinational corporations. He cites a Fortune 500 company with around $100 million trapped in Argentina due to capital controls and currency restrictions. Traditional methods to repatriate this cash are often inefficient, costly, and sometimes unfeasible.
Companies can bypass these restrictions using digital assets and distributed ledger technology while staying within legal boundaries. This approach allows for the movement of assets back to headquarters more efficiently, cost-effectively, and with less complexity than traditional methods.
Overcoming Hesitation in Adoption
Despite the clear advantages, the adoption of digital assets in treasury operations is still gradual. Noah attributes this to the cautious approach of corporate boards, legal teams, and risk management departments. These stakeholders require convincing that digital assets are legally safe but also secure and vetted.
Partnerships with reputable organizations like the Big Four accounting firms, technology consultants like Accenture, and blockchain analytics firms like Chainalysis are crucial to build trust and facilitate adoption. These partnerships help validate the use of digital assets and provide the necessary assurance to treasurers and CFOs.
Digital Assets in Addressing Treasury Concerns
Noah Herman explains how digital assets can address specific treasury challenges, including currency devaluation risks, legal issues, and operational complexities.
Mitigating Devaluation Risks in Transactions
He addresses concerns about currency devaluation during transactions involving digital assets. He suggests two solutions:
1. Using Stablecoins: By transacting with stablecoins or digital dollars, treasurers can avoid volatility typically associated with digital assets like Bitcoin.
2. Hedging Bitcoin Volatility: For those who prefer Bitcoin, he suggests using hedging solutions to offset the risk of Bitcoin’s value fluctuation during the transaction period.
Navigating Legal Concerns
The legal implications of incorporating digital assets into treasury operations are crucial. Engaging legal experts in digital assets law ensures compliance and adherence to local regulations. In jurisdictions where cryptocurrency usage is prohibited, operations are adjusted accordingly, maintaining legal integrity in all transactions.
Addressing the Trapped Cash Problem
Digital assets solve the “trapped cash” issue, where multinational corporations face difficulties repatriating funds due to various international capital and currency controls. Utilizing digital assets can streamline moving these funds back to headquarters, reducing costs and complexity.
Practical Use Cases in Treasury
A notable application involves using digital assets in escrow scenarios. In this context, funds held in escrow for services like vacation rentals can be converted into digital assets, potentially transforming a cost center into a profit center. This conversion can yield low-level returns and enhance the efficiency of asset movement.
Digital Assets in Trade Finance
Digital assets also play a significant role in simplifying trade finance processes, such as issuing project guarantees. This application is a testament to the versatility of digital assets in various corporate financial activities, mirroring the daily operations of treasury management.
The Role of Fortris in Treasury Optimization
Fortris emerges as a key player in this landscape, functioning as a treasury operations engine that harnesses distributed ledger technology and digital assets. Noah highlights how they at Fortris tailor their technology to address specific needs in treasury management.
The platform is designed to streamline global business transactions, reducing operational complexity and integrating with established financial systems. Leveraging digital assets exemplifies the potential for transformative change in traditional financial operations and treasury management.
Customized Technology Solutions for Treasuries
Fortris operates as a comprehensive ecosystem, adaptable to various treasury operations. They work with CFOs to identify pain points within their balance sheets or cash flow issues.
The technology offered by Fortris is flexible and can address diverse problems like trapped cash, cross-border payments, liquidity pooling, or subsidiary funding. Essentially, Fortris acts as a platform that can overlay existing treasury operations to identify and solve the most pressing problems efficiently.
Integration into the Treasurer’s Existing Systems
A key feature of Fortris’s service is its seamless integration into a treasurer’s existing landscape. The technology is designed to be user-friendly and familiar, requiring no advanced knowledge of digital assets or blockchain from the users.
Treasurers can access their financial information through common enterprise systems like SAP, Oracle, or Kariba. The platform simplifies the process by feeding into these systems, allowing treasurers to manage various currencies, including digital assets like Bitcoin, alongside traditional currencies. This integration ensures that treasurers can benefit from digital assets without overhauling their everyday processes.
Conclusion:
In conclusion, our exploration of digital assets underscores their transformative potential in modern finance and corporate operations. These assets, powered by blockchain technology, redefine asset management and transaction processes. We delved into various aspects, from stablecoins providing stability in volatile markets to blockchain’s role in efficient and secure transactions.
The application of digital assets in cross-border payments, highlighted by stablecoins, stands out for its efficiency and cost-effectiveness. These assets streamline international transactions, reducing complexity and cost significantly. In corporate treasury, digital assets offer innovative ways to manage funds, enhance efficiency, and solve issues like trapped cash.
However, volatility, legal concerns, and the practicalities of integrating digital assets into everyday operations persist. Addressing these hurdles requires a balance of innovation, regulatory compliance, and practical application. The role of platforms like Fortris in simplifying treasury operations using digital assets is pivotal, offering seamless integration with existing systems and easing the transition into this new digital era.
Digital assets, therefore, present a dual-faced reality: they are a beacon of innovation and efficiency, yet also a domain requiring cautious navigation. Embracing them involves understanding their complexities and potential, ensuring their integration into financial and corporate systems is as beneficial as revolutionary. As the landscape evolves, digital assets are poised to play an increasingly significant role in reshaping financial operations, promising a more efficient, secure, and dynamic financial future.
Frequently Asked Questions
What are Digital Assets in Finance?
Digital assets in finance refer to assets that exist in a digital format, often utilizing blockchain technology. This includes cryptocurrencies like Bitcoin and Ethereum, stablecoins like USDC and Tether, and other digital tokens. These assets represent a shift from traditional financial tools, offering new ways for asset management and transactions.
How is Blockchain Technology Transforming Finance?
Blockchain technology transforms finance by providing a decentralized, secure, and transparent way of recording transactions. It allows for the creation and exchange of digital assets without the need for intermediaries, reducing costs and increasing efficiency. Blockchain’s immutable ledger also enhances security and trust in financial transactions.
What are Stablecoins and How Do They Work?
Stablecoins are digital currencies designed to maintain a stable value by being pegged to a fiat currency, like the US dollar or euro. They combine the stability of traditional currencies with the efficiency of blockchain technology. Stablecoins are used for various financial transactions, offering a less volatile option than other cryptocurrencies.
How Do Digital Assets Benefit Corporate Treasury?
Digital assets offer several benefits for corporate treasury, including faster and cheaper cross-border transactions, reduced need for intermediaries, and improved efficiency in managing funds. They also provide opportunities for diversification and potential asset appreciation, making them a valuable tool for modern treasury management.
What are the Challenges of Integrating Digital Assets into Business Operations?
Integrating digital assets into business operations presents challenges such as volatility, regulatory uncertainty, and the need for technological infrastructure. Companies must navigate legal and compliance issues, understand the technological aspects of blockchain, and manage the inherent risks of digital currencies. Additionally, converting digital assets to fiat currencies and vice versa can pose practical challenges, especially in areas with limited digital asset acceptance.
