The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

The question is increasingly not whether there is an opportunity, but where that opportunity sits, and what it will take to capture it.

To understand how the market is developing, Reply and Frankfurt School of Finance & Management have surveyed 20+ financial institutions across the UK and EU over the past six weeks. 

The emerging findings point to a market moving from exploration towards execution. Interest is broadening across the digital asset value chain, but significant infrastructure, technology and regulatory barriers remain.

Opportunity across the value chain

Institutions are not converging around a single “winning” digital asset use case. 

Among the areas currently being explored:

• Delivery-vs-Payment settlement of tokenised securities is the most-cited central-bank-money use case; 
• collateral mobilisation and cash and liquidity solutions also attract significant interest; 
• across general use cases, interest is strongest around issuance and primary markets and trading and secondary markets; and 
• on-chain payments, securities financing and custody are also part of the emerging agenda. 

This breadth suggests that firms are increasingly looking beyond digital assets as a standalone product or technology. Instead, they are considering how DLT and tokenisation could change different parts of the value chain, from payments and liquidity to trading and asset servicing. 

The execution gap

Appetite does not necessarily translate into adoption. 

The three leading barriers identified by respondents are:

• lack of market infrastructure and common standards; 
• technology integration complexity; and 
• regulatory and supervisory uncertainty. 

These challenges are reflected in firms’ assessments of their capabilities. Data and system interoperability and regulatory readiness are seen as important areas to develop, but most respondents currently consider themselves to be at a basic or progressing stage rather than mature. 

The challenge is becoming less about identifying potential applications and more about making them work within existing technology, regulatory and control environments.

Open regulatory and operational questions

For UK firms, important regulatory and operational questions remain open. These include how different tokens should be classified; where custody responsibilities sit; and how the new cryptoasset prudential regime interacts with existing capital requirements and private-key controls. A majority of firms also identify authorisation or Variation of Permission readiness as an area where they expect to need external support over the next 12 months. 

These questions sit alongside a broader cross-border challenge. 2 in 3 respondents have not yet mapped where UK and EU requirements diverge for the same activities, including stablecoin backing, custody and prudential treatment. For institutions operating across jurisdictions, regulatory strategy therefore needs to develop alongside rather than after the commercial proposition. 

Moving from appetite to execution

Selecting the right use case is only the beginning. Turning it into a viable proposition requires a series of connected decisions about technology, regulation, risk and the operating model.

Depending on the activities being pursued, firms will need to consider:

• custody and wallet infrastructure; 
• financial crime and compliance capabilities; 
• whether technology should be built, bought or outsourced; 
• the regulatory implications of activities such as dealing, tokenisation and staking; and 
• how digital asset capabilities will integrate with core banking systems. 

Tokenisation illustrates this challenge particularly well. Creating the token is only one step. Firms also need to determine how ownership is recorded, how the asset is managed throughout its lifecycle, how primary issuance will work and how it can subsequently be traded or transferred. 

Beyond the hype

The emerging survey results suggest that institutional interest in digital assets is real. But interest alone will not drive adoption.

The next phase will be about execution: selecting the right use cases, resolving regulatory questions early and building the technology, controls and operating models needed to support them.

For financial institutions, the digital asset opportunity is becoming clearer. The differentiator will be the ability to turn that opportunity into something that works in practice.