Why Business Transactions Are Trudging Toward Digital Denomination
Part 2 of 3: What are the prospective benefits of incorporating digital currencies into corporate operations?
Last week, Treasury & Risk started a conversation with Alexander Bant, chief of research in the Gartner Finance practice, about why his firm predicts that 20 percent of large enterprises will be using digital currencies by 2024. Bant explained how the combination of smart contracts, blockchain technologies, and digital currencies have the potential to reduce, or even eliminate, human touch in the procure-to-pay process.
Although Gartner doesn’t yet see companies employing digital currencies in quite this manner, many are beginning to educate themselves about the implications of incorporating digital currencies into their operations. This week, we’re continuing the conversation.
Treasury & Risk: Beyond the increased efficiency for staff that we discussed last week, what are the other benefits to companies of implementing automation throughout the procure-to-pay cycle?
Alexander Bant: One potentially large benefit is in the area of fraud. North American companies that deal primarily with the Fortune 500 may not see a lot of fraud going on with corporate contracts. But once you move beyond that and start talking about entities in foreign locations, and you start considering the geopolitical conflicts that may arise, access to digital money that is outside the jurisdiction of any government entity might improve your trust in a business’s operations.
T&R: And why are digital currencies less vulnerable to fraud than transactions denominated in other currencies?
That said, if the company is using a blockchain where transactions are permanently recorded on a blockchain ledger in a certified format that cannot be altered, the transfer of money is forever verifiable. That adds a level of transparency that we do not have today with the movement of money. Hopefully, that would make bad actors think twice before taking malicious action against the organization—and if they were to move forward anyway, they would be caught almost immediately if the transaction was certified on the blockchain.
T&R: That makes sense. I’d also like to circle back to another benefit of cryptocurrencies that you mentioned last week: You suggested that putting corporate funds in crypto might insulate companies against inflation. But cryptocurrencies are notoriously volatile. Was your point that because cryptocurrencies don’t move with fiat currencies, their value doesn’t necessarily reflect inflation and other trends that may be prevalent in the global economy?
AB: It depends on which cryptocurrency we’re talking about and how it’s designed. Most of them have a limit on how much mathematically can be produced, unlike money that is printed by central banks and governments around the world. The constricted nature of many cryptocurrencies means that the value is potentially less eroded over time than that of fiat currencies. But this is hypothetical; cryptocurrencies haven’t been on the ground long enough to be studied throughout the ebbs and flows of a whole business cycle and cycle of changes in the money supply.
T&R: What other benefits do you expect companies to reap by adding digital currency options to their payments, investments, and/or receivables processes?
AB: Well, one other potential benefit I see, in the medium term, from an enterprise becoming more crypto-friendly is that transacting in crypto, or having digital currencies on the balance sheet, can change the mindset of employees. We’ve heard this from CFOs: Workers who are looking for a more digital corporate culture will gravitate toward companies that are leading the way in digital money.
An organization that is ahead of the trend in enabling this infrastructure may be able to access different labor markets and talent pools. Michael Saylor says that investing in bitcoin was a game changer for MicroStrategy in terms of the ways the company interacts with incoming and current talent. Having that commitment to the move toward digital currency really helps MicroStrategy keep employees engaged in the future of the organization.
T&R: Will central bank digital currencies [CBDCs] offer corporate treasury teams the same benefits as private cryptocurrencies?
AB: Without seeing the actual infrastructure behind a specific CBDC, that’s hard to answer. So far, nine nations have launched digital currencies, while another 15 are piloting them and 16 are developing them. And then 40 percent of remaining national governments are in the research phase. That’s where the U.S. is: In March, the Biden administration issued an executive order emphasizing the urgency behind research and development [R&D] into the technological infrastructure needed to support a digital currency from the Federal Reserve.
Rather than replacing current forms of money, a CBDC will be intended to provide more control over the country’s money supply through more targeted payments and monetary policy. It will be able to protect consumer privacy and more stringently prevent criminal activity. The CBDC will need to build trust behind the ledger, so it might look similar to cryptocurrencies like bitcoin. But it will probably not be as open and transparent. It will be certified with different mechanisms and will probably have very different characteristics under the covers because it’s government-owned.
T&R: How do you expect the landscape of CBDCs and cryptocurrencies to evolve in the next few years?
AB: It’s interesting. We’ve overcome a big hurdle globally in the past several years, which is the question of whether digital currencies—bitcoin, Ethereum, and others—will be allowed. Can they be issued? Can they be mined? Can they be held? Can they be traded? These used to be unknowns. But now the hundred (or so) biggest nations in the world have declared, one way or another, how they are seeing this develop.
India is a ‘no,’ but most of the world is friendly toward the use of digital currencies. Cryptocurrency is now legal throughout most of the European Union, although individual member states are implementing their own regulations. So a patchwork is emerging of temporary and incomplete regulations around the globe.
T&R: What are the main areas in which different jurisdictions have different approaches to regulating cryptocurrencies?
AB: The discrepancies are mostly focused on how they classify digital currencies. Many regulatory bodies classify digital currencies as property. And most of the regulation is currently focused on the miners and trading because that is where most of the activity is currently happening. But in the past six to nine months, we’ve seen a lot more talk around KYC [know your customer] rules and the impact of digital currencies on governments’ AML [anti-money laundering] efforts.
And then, of course, many governments are looking at how they can tax digital currencies as they trade and move around. In addition to calling for R&D on a possible digital dollar, the White House executive order from March lays out a national policy for digital assets across consumer and investor protections, financial stability, national security and competitiveness, and financial inclusion.
So, governments are making an effort to clarify their approach to cryptocurrencies as well as CBDCs, but if you talk to CFOs, the frameworks and guidelines and regulations still feel temporary for the most part. They don’t yet feel institutionalized in the way that we do business.
T&R: So, what should corporate treasury and finance teams be doing today to prepare for the future of digital currencies?
…
Read Bant’s response in Part 3 of this article, which will publish next week.