Solvency, Digital Trust and Capital Optimization in the Multi-Money Ecosystem with SAP Banking

Solvency: The Unseen Foundation of Stability Stablecoins are widely hailed as the crucial bridge connecting the volatile realm of cryptocurrencies with the stability of traditional finance. While their fixed value peg—typically to the US dollar—is the visible promise, their true stability rests upon an unseen anchor: the solvency of their private issuers. As Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England (BoE), recently articulated, the future of money is moving toward a “multi-money ecosystem.” In this ecosystem, central bank money, commercial bank money, and money issued by regulated non-banks (stablecoins) must be “freely and frictionlessly exchangeable” to preserve confidence and the “singleness of money.” This ambitious regulatory vision makes establishing robust solvency and risk frameworks for private digital currencies an urgent necessity. I. Stablecoins as Corporate Debt and SAP’s Role To understand stablecoin dynamics, it's essential to view them through a traditional financial lens: they are a form of short-term corporate debt. A fiat-backed stablecoin holder owns a digital IOU from the issuer, redeemable 1:1 for fiat currency. Consequently, the coin’s value is directly contingent on the issuer's financial health, liquidity management, and transparency. This framing aligns stablecoins with classic debt instruments. Here, SAP’s financial backbone, leveraging SAP Banking, provides the ideal platform for issuing and managing stablecoins as digital liabilities within existing, trusted financial operations. Global corporations already rely on SAP for treasury, debt, and liquidity management, meaning extending digital issuance leverages proven governance structures. Moreover, SAP’s unified architecture ensures data integrity and real-time reporting of reserves and solvency, providing automated operational efficiency to support regulatory-grade auditability. II. When the Anchor Drags: Solvency and De-Pegging History shows that stablecoin solvency is not an abstract concept. Incidents, whether caused by insufficient or illiquid reserves or external contagion (such as the USDC/SVB incident in March 2023), consistently prove that solvency erosion directly translates into a loss of trust and a broken peg. The distinction from traditional banking crises lies in the speed of propagation: in digital finance, the deterioration of solvency can manifest instantaneously, visible to all market participants, triggering rapid liquidity crises (digital bank runs). III. Regulation and the Digital Restoration of Trust Regulators worldwide, including the BoE, are focusing their frameworks on solvency safeguards for systemic stablecoins. These measures are designed to restore and maintain public trust, focusing on: 1:1 Backing: Mandating that stablecoins be fully backed by High-Quality Liquid Assets (HQLA), typically short-dated sovereign debt. Transparency: Requiring regular, independent audits and transparent public disclosures regarding reserve composition and management. Protection: Ensuring the segregation of reserves from the issuer's operational funds to protect holders in the event of insolvency. These rules fundamentally assert that trust in private money must be earned through demonstrable, verifiable solvency. IV. The Invisible Digital Backbone: SAP’s Financial and Risk Architecture In the "multi-money" future, solvency confidence depends not just on capital, but on data credibility. Given that roughly 70% of global GDP interacts with an SAP system, SAP acts as the invisible infrastructure of financial trust. SAP’s Integrated Financial and Risk Architecture (IFRA), powered by SAP Financial Services Data Management (FSDM), provides the necessary digital spine for robust solvency and liquidity monitoring. This architecture achieves a holistic view by consolidating all critical data in real time, ensures integrated risk and finance views for consistent solvency assessment, and facilitates automated regulatory reporting for compliance with frameworks like Basel IV and BoE standards. Critically, it guarantees auditability and transparency through full data lineage. V. The Trust Transmission Problem: Information as a Solvency Asset Solvency isn't just about being solvent; it’s about being believed to be solvent. The ability to rapidly transfer transparent, auditable solvency information acts as a competitive financial differentiator. When solvency analysis is fragmented—relying on manual, spreadsheet-based reporting—it lacks the instantaneous, inherent credibility provided by integrated architectures like SAP IFRA. Digital solvency reporting is not a mere technical feature—it is a financial differentiator, translating solvency from an internal accounting concept into an externally trusted, verifiable signal. VI. Compliance, Regulation and Capital Optimization The integrated architecture of SAP moves solvency compliance from a reactive measure to a strategic resilience tool. Regulations like Basel IV and IFRS 9 demand forward-looking stress testing to ensure realistic Expected Credit Loss (ECL) projections and accurate capital adequacy under economic shocks. SAP Analytical Banking supports this convergence: SAP BASEL IV automates Credit Risk Capital computations, integrating stress test outputs. SAP FPSL (Financial Products Subledger) enables IFRS 9 provisioning with high granularity and scenario-based stress testing. SAP IFRA + FSDM unify financial and risk data, ensuring reconciliation and integrity between both frameworks. This convergence enables enhanced data quality, streamlined regulatory reporting, and a unified, transparent risk view that strengthens institutional resilience. VII. The Road Ahead: Tokenization with Trust DLT and tokenization are here to stay. Yet, as Breeden cautioned, innovation must never fracture monetary trust. The key to a resilient, integrated multi-money system is not the DLT itself, but the trust in solvency it enables, underpinned by digital integrity and regulatory coherence. In this future, SAP’s financial and risk architecture serves as the invisible digital backbone—it operationalizes the very trust that allows private money to seamlessly function alongside central bank and commercial bank money. In essence, SAP does not issue money, it operationalizes trust. A Practical Example: Operationalizing Stablecoin Solvency with SAP The Digital Trust Challenge Digital Trust Corp (DTC) is a major issuer of a US-dollar-pegged stablecoin. Following new mandates from the Bank of England (BoE) that treat systemic stablecoins as forms of corporate debt, DTC faces a critical requirement: proving that its capital reserves are sufficient and resilient, even under severe economic stress (like a rapid decline in the value of their High-Quality Liquid Assets, or HQLA). The core issue is preventing the solvency crisis from turning into a trust crisis. This demands a real-time, unified view of Finance and Risk data. The SAP Integrated Architecture Response DTC relies on the SAP Integrated Financial and Risk Architecture (IFRA), powered by SAP Financial Services Data Management (FSDM), as the invisible backbone for its operations. 1. Unified Data Foundation: The first step is data integrity. FSDM unifies all critical data—the circulating stablecoin liability and the underlying HQLA reserve portfolio (mostly short-dated sovereign debt)—into a single, golden source. This immediately solves the common problem of data fragmentation, ensuring that the Finance department and the Risk department are always assessing the company's financial health using the exact same, auditable figures. This crucial step guarantees full data lineage and transparency, essential for regulatory scrutiny. 2. Calculating Risk and Accounting Provisions: Next, DTC must calculate how much capital they need to set aside to cover potential losses. Using SAP Financial Products Subledger (FPSL), integrated into the IFRA platform, DTC applies its IFRS 9 impairment models to the reserve assets. This process automatically calculates the Expected Credit Loss (ECL) across various stress scenarios—for example, modeling the potential loss if the sovereign debt market were to suffer a sudden 10% decline. This provides an accurate, automated assessment of the necessary balance sheet provisions. 3. Strategic Capital Optimization: The resulting ECL projections are immediately fed into the SAP BASEL IV application. This allows DTC's risk managers to automate the computation of Credit Risk Capital required under the severe stress scenario. By integrating the accounting view (IFRS 9 ECL) with the capital adequacy view (Basel IV RWA), DTC achieves seamless reconciliation and ensures compliance. Crucially, this integrated process moves beyond mere compliance; it enables Capital Optimization by providing clear, real-time insights into the true risk cost of holding different reserve assets, enhancing institutional resilience. 4. Earning Digital Trust: In the end, SAP's architecture allows DTC to move from manual, fragmented reporting to generating automated, verifiable regulatory disclosures. When regulators or the market demand proof of solvency, DTC can instantly provide reports that are inherently credible because they originate from the same system that manages the corporate balance sheet. This ability to rapidly transmit transparent, auditable solvency information is the ultimate competitive advantage, transforming being solvent into being believed to be solvent. SAP, therefore, is not merely a tool for accounting; it is the operational engine that translates reserves into regulatory trust. Connect and Stay Informed: Join the Conversation: Connect with fellow professionals in the SAP Banking Group on LinkedIn. https://www.linkedin.com/groups/92860/ Stay Updated: Subscribe to the SAP Banking Newsletter for the latest insights. https://www.linkedin.com/newsletters/sap-banking-6893665983048081409/ Explore More: Visit the SAP Banking Blog for in-depth articles and analyses. https://sapbank.blogspot.com/ Connect Personally: Feel free to send a LinkedIn invitation; I'm always open to connecting with like-minded individuals. ferran.frances@gmail.com I look forward to hearing your perspectives. Kindest Regards, Ferran Frances-Gil. #SAP #Stablecoins #DigitalFinance #Fintech #FinancialStability #BankofEngland #SAPBanking #Tokenization #Solvency #Regtech #CapitalOptimization