Cryptocurrencies such as Bitcoin have developed from a periphery investment into a semi-viable functional asset, with many banks, institutions, and investors exploring its potential as a payment alternative.
Tesla’s $1billion Bitcoin investment last month sent prices rocketing and increased the currency's prominence to boardrooms around the world. Although it is still early days, business interest is rising. But is it enough to be seen as an addition to global payment ecosystems?
The future of crypto continues to split opinion. Loyalists believe it is a replacement for fiat currencies. Others feel it is a risky but efficient way of growing their investment returns and diversifying their portfolios. In some areas, it is being explored as an inflation hedge for gold, and a final group sees it as a decentralised global payment tool.
Whatever camp you may fall into, it is clear that ignoring the hype and hoping for it to pass is no longer a viable strategy. Crypto is likely to garner more interest in the coming years. However, I would express caution to any corporate treasurer looking to bear down on a strategy of using it as a payment tool any time soon.
How does it fit into payments?
A small number of companies globally have begun to accept payments in cryptocurrencies, and it is anticipated that this number will grow - especially as central bank digital currencies gather pace. We also anticipate the growth of the use of cryptocurrencies as an answer to capital restrictions in emerging economies. For example, we see more and more clients requesting crypto payments to countries such as Argentina or Nigeria where capital controls are tight and trust in the national currency remains limited.
Mastercard and PayPal have both recently grown their crypto presence by accepting payments via Bitcoin. Citi published a report that has been met with some skepticism. However, the underlying key points chime with the current market sentiment, with one of the main cruxes being Bitcoin becoming the currency of choice for global trade.
In the digital world that we operate in, a decentralised global currency is a desirable asset. It may solve some of the issues facing treasurers and finance teams today, such as mismanagement of costly foreign and multi-currency payments and the issue of slow payments. Both these could hypothetically be solved by a standardised international payment process - e.g. a cryptocurrency without national borders.
However, to rest the financial fate of a company, crypto still shows two disadvantages. Firstly, the wild fluctuations create risk and make treasury forecasting almost impossible. And secondly, the accounting of those instruments would require infrastructural changes since most current accounting systems do not recognise cryptos. Ultimately, cryptos for financial management is still very much in its proof phase.
Crypto in itself is not the magic solution. Even using those assets, finance teams and treasurers will still have to look at how they can optimise their current payment systems by embracing digitisation and process automation.
Payment systems are incredibly outdated - adding efficiency, improving speed, reducing costs and offering greater control and flexibility should be the immediate priority. There are systems in place that can collate all foreign international payments into one account or dashboard. This provides tangible business benefits - today.
To jump straight from a system consisting of multiple foreign bank accounts and Excel documents to a hypothetical decentralised cryptocurrency many people know very little about, could be potentially devastating. It is very much a case of trying to walk before you can run.
Where does the future lie?
At the time of writing, Bitcoin’s price hovers around $56,000, and over the next 12 months, some analysts expect it to reach $70,000 or even $100,000. These numbers are almost unfathomable to comprehend, but even opponents of the cryptocurrency movement have taken notice and developed strategies to embrace or, at the very least, explore its viability.
Bitcoin and other cryptocurrencies are likely to have a lasting impact on the financial markets and the business world. The speed at which it is adopted, and developments around a regulatory ecosystem, will be keenly watched.
Many of the world's more forward-looking companies are beginning to embrace the real-world application of instruments like Bitcoin and implementing strategies to invest, pay and utilize them. Given this, it may very well be the case in five years that most international companies will have a dedicated crypto strategy. Managing the volatility risk will definitely be the key to adoption alongside the launch of the crypto derivatives market which may also greatly help.
However, until actual regulation comes into place, the payment systems we all use today are going nowhere. Companies need to address their international payment requirements today by optimising their conventional FX strategy and identifying the holes that need plugging.
It may seem increasingly attractive to look towards cryptocurrency as a potential payment strategy; however, now is not the best time to put all your eggs in that basket.
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