September 28, 2022
  • September 28, 2022

Digital currencies underpin a sci-fi future for the Treasury

By on May 10, 2022 0

It is no news to anyone that Treasury organizations tend to be conservative. Some stress the importance of innovation, but even these are very cautious about making big changes that could impact business cash flow. And yet, every treasury team on the planet faces a prospective change in one of the most fundamental aspects of its field: the nature of money.

Digital currencies already exist, of course. Treasurers are debating 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 the value of cryptocurrencies has made it easy for many corporate treasurers to overlook the opportunity hidden behind the substantial risk.

That’s why Gartner’s prediction last December that one in five multinational companies will use digital currencies by 2024 caught our attention. Cash and risks spoke with Alexander Bant, head of research at Gartner Finance, to learn more.

Cash & Risk: So, I’ll start by asking what Gartner sees in the market. Where are businesses headed, and where are they now, in terms of integrating digital currencies into their operations?

Alexander Bant: We at Gartner believe the move towards digital currencies is part of a journey towards what we call “autonomous finance”. The end goal of autonomous finance is still far in the future, but CFOs are already on their way in that direction. Today, many treasury and finance groups are focusing on their data and solution providers, investing in automation and artificial intelligence. It is a stage of the journey. We believe the next part of this journey – involving blockchain, digital currencies, tokens and smart contracts – will change the world of finance.

Gartner research at the end of 2021 suggests that 51% of CFOs planned to assess the risks and opportunities associated with digital currencies in 2022. We expected this number to be significantly lower, but it was a good news: 2022 will be a year of education.

T&R: What do treasury and finance teams do for training?

A B: They try to understand the risks and quantify the benefits, working cross-functionally to come up with a theory as to why cryptocurrency does or does not make sense for their organization.

We think of longer-term benefits and use cases in two compartments: the first is as a store of value for the business. Treasury and finance groups debate whether cryptocurrencies are a good tool to protect excess cash on corporate balance sheets from the forces of long-term inflation.

And the other bucket is about smart contracts and programmable money. We believe that if customers and suppliers start wanting to execute smart contracts on the blockchain, companies will have to change the way they do business. Payments will be made faster, with fewer errors or risk of fraud. This will alleviate fears of missed payments and late payments.

T&R: So what are “smart contracts”? It’s a term I don’t know.

A B: Basically, smart contracts are one component of a highly automated supply chain system that initiates payments after verifying that the terms of the contract have been met. They represent the evolution from a standard contract to a blockchain, with terms that can be verified without human intervention.

Imagine a grocery chain that buys bananas from Jamaica. The grocer and the farmer sign a smart contract which stipulates that the farmer will deliver a certain number of bananas each week. The farmer affixes a barcode to each shipment of bananas. When a shipment arrives at the grocery store, it is automatically scanned by a system that communicates to the smart contract on the blockchain that the bananas have arrived. As a result, the smart contract initiates the payment.

This process saves grocery store staff from having to account for bananas, read a physical contract to ensure the shipment meets contractual requirements, or go through the process of issuing payment. Additionally, as the smart contract uses digital currency to pay, the payment arrives instantly in the farmer’s bank account.

T&R: This degree of automation would dramatically improve efficiency throughout the supply chain, right?

A B: Yes. We believe that ultimately digital currency transactions should reduce transactional financial costs by streamlining payment flows from customers to suppliers. And as Procure-to-Pay processes become more transparent, the organization’s transaction costs will drop.

Chances are, smart contracts will also streamline business legal and audit workflows. When contracts and money are more programmable, and the flow of information related to contracts being executed and money transfers is so seamless, the legal and audit workflows needed to detect fraud and breaches of contract become much easier. If everything is on the blockchain, it reduces complexity and fragmentation throughout payments and all ancillary processes.

T&R: Are companies actually implementing this level of automation, or is it just a possibility you see in the future of science fiction?

A B: Not many companies are doing it yet, but some are starting to experiment with it. And we’re actually seeing a huge increase in the number of multinational companies integrating blockchain into the way they account for goods and services. Companies from all kinds of industries are interested in it, from pharmaceuticals to agriculture. At the same time, cryptocurrency platforms like Ethereum have developed self-executing contracts. We believe that these two trends will develop together over the next few years. Eventually, enterprise blockchains and smart contracts will work together, with crypto payments then flowing to the enterprise ledger.

T&R: So which use cases for crypto are most common in enterprises right now?

A B: There have been notable developments in businesses “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 is not a true crypto-to-crypto payment flow to the company ledger. There are companies like Tesla and MicroStrategy that add cryptocurrencies to their balance sheets as a hedge against inflation or for long-term capital preservation. But most businesses that currently transact in cryptocurrency use an exchange to do so.

The other move we’ve seen is KPMG’s Canadian Treasury group adding a small amount of bitcoin and ether [the currency of the Ethereum platform] on their balance sheet. This decision is largely to signal to clients that they are ready to help with 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 are also learning that individual companies are considering the possibility that some nation states will only do business in digital currency. I was talking to a major oil and gas company that ran risk scenarios on how it would react if a country like Argentina were to go crypto-only. If that were to happen, companies exposed in this country would need a game plan to instantly start transacting directly in cryptocurrencies.

To be clear, there is no indication that any country is planning to do so. But if you look at the global economy and inflation rates in parts of the developing world, it doesn’t seem like a totally drastic move. So, some large multinationals are thinking about how they would make and receive payments in non-essential markets in case they went crypto-only.

T&R: Beyond increased staff efficiency, what are the other business benefits of implementing automation throughout the procure-to-pay cycle?

Read Bant’s answer in part 2 of this article, which will be published next week.