Cryptocurrencies and Corporate Treasury: Where We Are Today
With asset management companies like MicroStrategy and Stone Ridge Holdings buying up Bitcoin, could mainstream corporate adoption of cryptocurrencies be next?
Cryptocurrencies promise a number of benefits to treasury:
- Decoupling from government-backed fiat currencies
- Low-cost transactions due to the avoidance of hefty bank fees
- Real-time or near real-time transactions
- Reduced fraud, as by nature cryptocurrency is almost impossible to counterfeit or spend twice
- Transaction privacy (or transparency) to minimize risk while accommodating auditability
But is cryptocurrency ready for corporate prime-time? In this post, we take a look at the reasons why cryptocurrencies — and Bitcoin in particular — are gaining in popularity right now.
Economic Instability is Driving Change
The promises of reduced fraud and transaction privacy can also be seen as security threats. To prevent cryptocurrencies from being used for illegal activities such as money laundering and terrorism funding, many governments have recently expanded or enacted new AML/CTF laws that include cryptocurrency transactions and the financial institutions that facilitate them.
However, the U.S. has lagged behind, despite comments earlier this year indicating that President Trump intended to introduce new AML requirements for cryptocurrencies.
Meanwhile, the dollar has depreciated and isn’t likely to regain lost ground anytime soon. With continuing global economic uncertainty ahead due to the COVID-19 pandemic, decentralized cryptocurrencies have become even more attractive to companies doing business in USD, as they are not tied to a governmental framework that may be headed into a recession.
The June 2020 Crypto Research Report predicted that cryptocurrency values will continue to climb steadily, with Bitcoin projected to be worth $341,000 in five years’ time. It just passed the $18,000 mark this month, so that’s a significant savings gain for a treasury reserve — and therefore seems like a low-risk bet for those companies that can afford to buy in bulk now.
The Ripple Effect of Cryptocurrency Regulation
The RippleNet payment platform, designed to allow fast, low-cost payment transactions, is currently facing challenges in the form of cryptocurrency regulation.
The lack of a consistent regulatory framework for cryptocurrency exchange in the U.S. has proved problematic for companies like Ripple, whose technology acts as both a cryptocurrency (XRP) and a digital payment network for financial transactions. Right now, Bitcoin and Ethereum are exempt from U.S. securities laws, but XRP is not.
Cross-border payments have consistently been a source of pain for corporate treasurers. Fintechs like Ripple, along with blockchain, the underlying technology upon which most cryptocurrencies are based (XRP being a notable reception) have the potential to change the way we all make payments.
Having the ability to speed up payment processes, provided the right security and compliance controls are in place, could lead to new standards for excellence. But we’re not there yet.
It has yet to be proven that blockchain financial systems can best more widely adopted technology such as SWIFT gpi for speed and scalability, security concerns aside. And until more comprehensive global (or at least regional) laws are put into place, it will be hard to get there — unless the need is driven by the same large multinational corporations that are stocking up on Bitcoin right now.
Having a diversified treasury reserve is smart, but fiat currencies aren’t going to vanish overnight — nor are the payment rails that support them.
While cryptocurrencies are bullish and the outlook is positive, there are still enough concerns to make it wise for treasury to consider them as one of many currency offerings, and blockchain-based payment networks as one more potential transaction channel.
Fides is always looking for new and innovative technology and technology partners to help our corporate treasury clients. We already support the widest range of payment and bank messaging methods and channels for our clients, and are actively looking at adding new and complementary services to our multibanking ecosystem.