Research and Development, and Developing a Point of View
Part 3 of 3: What should corporate treasury and finance teams be doing today to prepare for the digital future of currencies?
For the past two weeks, Treasury & Risk has been speaking with Alexander Bant, chief of research in the Gartner Finance practice, about the future of digital currencies. Gartner predicts that 20 percent of large enterprises will be using digital currencies by 2024, and we wanted to understand why.
We’ve discussed with Bant the prospective benefits to corporates of using digital money for payments, cash investments, and sales. He’s also explained where central bank digital currency (CBDC) development and cryptocurrency regulation stand, as well as the use cases that some companies are beginning to pursue.
We’re concluding the discussion this week by asking what corporate treasury teams should expect in the near future, and what they should be doing now to prepare.
Treasury & Risk: So, given where companies currently are in the research and evaluation process, what needs to happen before digital currencies become widely accepted in corporate treasury operations?
Alexander Bant: Gartner’s primary focus in the digital currency arena, thus far, has been monitoring providers of technologies that support the digital currency ecosystem. And those providers generally fall into a few buckets.
One is the tax software companies. Tax software for crypto typically focuses on the miners or individuals who are trading cryptocurrency and need to report their trades in a solution like, say, TurboTax. A lot of the providers in this space are starting to invest in bolt-ons to the company ledgers, as well as in solutions to help small companies do their tax reporting if they’re accepting payments directly in a digital currency.
There are data analytics providers looking at pricing of alternative cryptocurrency payments and fee analytics. And then the final bucket we’re evaluating at Gartner is the smart contracting applications in the procurement space, which can automate execution of both contracts and payments. [For more on smart contracts, see the first article in this series.]
As software solutions in each of these buckets become more sophisticated and integrate more tightly into a cohesive ecosystem, using digital currencies will become more feasible for companies of all sizes and in all sectors.
T&R: What are the process-related decisions that companies should be considering today, as the supporting software continues to develop?
AB: The first thing companies need to consider is what their custody mechanism will be if and when they begin doing business in digital currencies. Going the self-custody route and keeping some of the assets in-house may seem safer, but that introduces the risk of loss of the cryptocurrency. To mitigate that risk, the company will have to closely control who has authority to conduct transactions, as well as how transactions are monitored and recorded.
Conversely, going with an exchange or custodian raises other questions around private keys and passwords. There are also questions around what policies the external custodian has in place to deal with upgrades on the blockchain ledger and what types of reporting or statements the custody provider would relate back to the currency owner.
The second area that companies should be giving attention right now is strategizing on how to handle AML, KYC, and OFAC compliance. Today, as companies engage in transactions with large customers and nation-states around the world, a lot of the compliance activities are handled by the bank. But if treasuries start dealing in cryptocurrency and remove some of those banking partners from their transactions, they will potentially have to take on a lot of the AML, KYC, and OFAC workload themselves. Companies considering moving into crypto should be working on their compliance strategy.
And then, the other big issue is around tax treatment and understanding how to segment the wallets that are being used to conduct transactions in order to make sure that all requisite taxes are paid. When a company receives a crypto payment, it has to carefully track and calculate the applicable sales tax, indirect tax, value-added tax on goods and services, etc. A major difference between cryptocurrency and traditional currencies is that crypto triggers a gain or loss of the underlying asset in the transaction, and that introduces a new type of tax risk to the organization. So, it’s important for CFOs to maintain segregated wallets as much as possible.
Those are some of the big decision points that any CFO or treasurer needs to think through before dipping their toes into transactions denominated in a digital currency.
T&R: Clearly, companies need to be trying to understand all the ways their operations would have to change to support digital currency transactions. Are there other steps they should be taking today to prepare for the transition to a crypto future?
AB: So, there are three things that we are currently advising corporate finance leaders to spend time on in 2022. The first is defining, at a very fundamental level—for the entire C-suite and board of directors, even for investors—what they mean by “digital currencies.” CFOs and treasurers need to explain what cryptocurrencies are, what CBDCs are, what smart contracts are. They can either take the standard definitions that are available in the marketplace, or come up with what these terms mean for their own organization. But every company’s leadership team needs to agree upon a standard set of definitions. That will be the backbone of their decision-making going forward.
The second thing we’re advising is for all finance leadership teams to come up with a point of view. When the CEO walks into your office and asks whether the company should be transacting in crypto, do you want to be caught flat-footed and not know how to talk about it? That would immediately put treasury and finance on the defensive. Instead, treasurers and CFOs should be prepared for that type of question. When the CEO asks, they should be ready to say, “Here’s the research we’ve done. Here are our definitions. Here’s what we think makes sense right now for our organization, and here’s why.”
And the third big thing that we’re advising CFOs and treasurers to think through is scenario planning. They should understand what external forces might cause the major markets in which they do business to move to transacting in digital currencies. They should likewise understand what the company’s stakeholders are thinking, and what their competitors are doing. Do suppliers or employees want to get paid in digital currency? Is a competitor transacting in a digital currency already, or is it likely to issue its own token?
We think 2022 should be the year of learning as much as possible about digital currencies and developing well-informed definitions, points of view, and scenarios.
T&R: What about the issue of price volatility: Is there anything treasury and finance teams can be doing now to prepare their company for doing business in a currency whose value may swing dramatically?
AB: Well, we asked CFOs last year—in separate research from the study we started out this series talking about—how they felt about moving cryptocurrency onto their balance sheets. Eighty-four percent said the number-one risk to the organization of transacting in cryptocurrencies was volatility. They feared that if they bring such a volatile asset onto their balance sheet or conduct payments with such a volatile asset, not only would the accounting get complex, but the valuation of the digital currency itself could harm the organization in the near term.
However, we believe that as more institutional investors come into the asset class, we should see digital currencies stabilize more. And the way we get more institutional investors in is through regulation. So, as the structures around digital currencies—oversight of stablecoins and an auditing framework, market regulation, token regulation, investor protections, tax policy—as those structures are solidified and feel less temporary, that should help institutional investors come into the asset class, which will stabilize the price.
And then digital currencies will be primed to bring corporate treasury and finance groups a degree of efficiency, accuracy, speed, and visibility into global cash flows that has never before been possible.