Digital Currencies Underpin a Sci-Fi Future for Treasury
Part 1 of 3: In what ways will digital currencies drive treasury processes and day-to-day corporate operations in the future—and where do treasury groups currently stand in that journey?
It’s news to no one that treasury organizations tend to be conservative. Some emphasize the importance of innovation, but even those are very careful about making big changes that might impact corporate cash flows. And yet every treasury team on the planet is facing a prospective shift in one of the most foundational aspects of their domain: the nature of money.
Digital currencies already exist, of course. Treasurers are grappling with whether to incorporate cryptocurrencies like bitcoin into any area of operations. A few prominent companies, including Tesla and MicroStrategy, have bet on crypto—for better or for worse. But the wild volatility in cryptocurrencies’ value has made it easy for many corporate treasurers to ignore the opportunity hidden behind the substantial risk.
That’s why Gartner’s prediction last December that one in five multinational businesses will be using digital currencies by 2024 caught our attention. Treasury & Risk spoke with Alexander Bant, chief of research in the Gartner Finance practice, to find out more.
Treasury & Risk: So, I’ll start by asking what Gartner is seeing in the marketplace. Where are companies going, and where are they currently, in terms of integrating digital currencies into their operations?
Alexander Bant: The way we see it at Gartner, the move toward digital currencies is part of a journey toward what we call ‘autonomous finance.’ The end goal of autonomous finance is still very much in the future, but CFOs are already on their journey in that direction. Today many treasury and finance groups are focused on their data and solution providers, investing in automation and artificial intelligence. This is one step in the journey. We believe that the next part of that journey—involving blockchain, digital currencies, tokens, and smart contracts—will change the world of finance.
Gartner’s research in late 2021 suggests that 51 percent of CFOs were planning to assess the risks and opportunities associated with digital currencies in 2022. We expected that number to be substantially lower, but that was good news: 2022 will be a year of education.
T&R: What are treasury and finance teams doing to educate themselves?
AB: They are trying to understand the risks and quantify the benefits, working cross-functionally to come up with a theory on why cryptocurrency does or does not make sense for their organization.
And the other bucket is around smart contracts and programmable money. We believe that if clients and vendors start wanting to execute smart contracts on the blockchain, companies will have to change the way they do business. Payments will be made more quickly, with fewer errors or risk of fraud. That will alleviate fears of missed payments and late payments.
T&R: So, what are ‘smart contracts’? That’s a term I’m not familiar with.
AB: Basically, smart contracts are one component of a highly automated supply-chain system that initiates payments after verifying that contract terms have been met. They represent the evolution of a standard contract onto a blockchain, with terms that can be verified without human intervention.
Imagine a grocery chain that buys bananas from Jamaica. The grocer and farmer sign a smart contract that says the farmer will deliver some number of bananas every week. The farmer applies a barcode to every banana shipment. When a shipment arrives at the grocery store, it is automatically scanned by a system that communicates back to the smart contract on the blockchain that the bananas arrived. As a result, the smart contract initiates payment.
This process removes grocery staff from having to account for the bananas, read through a physical contract to make sure the shipment meets contracted requirements, or go through the process of getting the payment issued. Additionally, because the smart contract uses digital currency to pay, the payment arrives in the farmer’s bank account instantly.
T&R: This degree of automation would significantly improve efficiency throughout the supply chain, wouldn’t it?
AB: Yes. We believe that, over time, transactions in digital currencies should reduce transactional finance costs by streamlining payment flows from customers to suppliers. And as procure-to-pay processes become more seamless, the transaction costs of the organization will fall.
There’s a good chance that smart contracts will streamline companies’ legal and audit workflows, as well. When contracts and money are more programmable—and the flow of information related to the contracts being executed and money changing hands is so transparent—then the legal and audit workflows required to spot fraud and breaches of contract become much easier. If everything is on the blockchain, that reduces complexity and fragmentation throughout payments and all the auxiliary processes.
T&R: Are companies actually implementing this level of automation, or is this just a possibility you see in the sci-fi future?
AB: There are not a lot of companies doing this yet, but some are starting to experiment with it. And we are actually seeing a huge uptick in multinational companies that are embedding the blockchain into the way they account for goods and services. Companies across all kinds of industries are looking at this—from pharmaceuticals to farming. At the same time, cryptocurrency platforms like Ethereum have developed self-executing contracts. We think these two trends will develop together over the next few years. Eventually, business blockchains and smart contracts will function together, with crypto payments then flowing through to the company ledger.
T&R: So, what crypto use cases are most common in companies right now?
AB: There have been some notable developments in companies ‘accepting’ cryptocurrency payments. Amazon, Home Depot, and the Starbucks app all advertise that customers can pay in bitcoin. But what they’re really doing on the back end is using an intermediary that converts customers’ bitcoins into fiat currencies. It’s not a true crypto-to-crypto payment flow through to the company ledger. There are companies like Tesla and MicroStrategy that are adding cryptocurrencies to their balance sheets as an inflation hedge or for the long-term preservation of capital. But most companies that are currently transacting in a cryptocurrency are using an exchange to do so.
The other move that we’ve seen is KPMG’s Canadian treasury group adding a small amount of bitcoin and ether [the currency of the Ethereum platform] to their balance sheet. That move is largely about signaling to clients that they are ready to help on tax, regulatory, and reporting issues related to cryptocurrency. [Benjie Thomas, managing partner at KPMG’s Canada office, explained the purchase by saying, “This investment reflects our belief that institutional adoption of crypto assets and blockchain technology will continue to grow and become a regular part of the asset mix.”]
But we’re also hearing from individual companies that they’re considering the possibility that certain nation-states might move to doing business only in digital currency. I was talking to a large oil-and-gas company that has been running risk scenarios around how it would respond if a country like Argentina were to move to crypto exclusively. If that were to happen, companies with exposures in that country would need a game plan for how to instantly start transacting directly in cryptocurrencies.
To be clear, there is no indication that any country is planning to do that. But if you look at the global economy, and the inflation rates in some parts of the developing world, it doesn’t seem like that would be a totally radical move. So, some large multinationals are thinking about how they would make and receive payments in non-core markets in the event that they became crypto-only.
T&R: Beyond the increased efficiency for staff, what are the other benefits to companies of implementing automation throughout the procure-to-pay cycle?
…
Read Bant’s response in Part 2 of this article.