Uldis Tēraudkalns, CEO of Nexpay
Markets are decidedly more positive about blockchain-based crypto currencies following the approval on 10 January by the US Securities and Exchange Commission (SEC) of 11 bitcoin ETFs in the United States.
Simultaneously, central banks are pushing ahead with plans for CBDCs (Central Bank Digital Currencies) which will be inherently less volatile - one of the key causes of concern for CFOs. According to industry analysts Gartner, over eight out of 10 finance executives believe that Bitcoin poses a financial risk due to its rapid, deep and unpredictable price fluctuations. Finance chiefs are understandably cautious about adding an asset to the balance sheet when its value is so prone to change.
These twin developments raise the likelihood of a mixed fiat/crypto economy emerging before 2030. It is important for CFOs in larger enterprises to start planning for this.
Solid business reasons to plan for a mixed crypto economy
One compelling reason is that cryptocurrency-friendly consumers are a highly attractive market. A new study by Harvard Business School professor Marco Di Maggio concludes they “have higher household incomes, live in wealthier and more educated ZIP codes, like to gamble, frequently use credit cards, and often overdraft their checking accounts”.
Another is that, for business users, cryptocurrencies offer important benefits over traditional fiat currencies. Upsides include automation, financial efficiency, faster and cheaper cross-border transactions, reduced transaction fees, and greater transparency and security. A report by asset manager Amundi makes the case that a fully disintermediated cryptocurrency system could enable faster, cheaper, and more inclusive payments.
As a result, mainstream businesses prepared to work with crypto can get ahead of their competitors. A recent survey by Sage found that 44% of UK finance leaders believe that decentralized currencies will prove ‘extremely’ viable as a long-term payment solution. As more consumers adopt cryptocurrencies, businesses that do not accept them risk being left behind.
6 planning scenarios for CFOs:
- Automation and efficiency: Blockchain provides a way to structure and process data without the need for a central authority. CFOs can leverage this superpower to integrate operational and financial processes, replacing conventional siloed approaches to transaction processing. Full end-to-end transparency across operations and finance will be achievable. As blockchain reaches deeper into finance operations, transactions will be touchless, creating opportunities to radically simplify processes and free up people.
- Optimized working capital: Blockchain can also drive significant efficiencies and cycle-time reductions, enabling predictive operational insights and opportunities to optimize working capital.
- Risk management: Non-CBDC cryptocurrencies fluctuate wildly in value and you need robust risk management to handle that. There is a lot to consider here, including: quantitative modeling to regularly measure value at risk from crypto price fluctuations; dynamic position limits for open cryptocurrency exposures based on historical and implied volatility levels; and hedging strategies and instruments like Bitcoin futures and options to protect against severe downward price swings. And don’t forget a clear policy on when to convert crypto to fiat to avoid prolonged volatility exposure.
- Regulatory compliance: As the SEC’s recent decision on ETFs proves, cryptocurrency regulation is constantly evolving. CFOs need to keep up-to-date with the latest regulations and one way to do that is via regulatory updates, such as those available from the Financial Conduct Authority (FCA) in the UK. Conferences and events focused on cryptocurrencies are another good way to stay informed, as is consulting external experts for insights.
- Tax implications: These vary widely. In the US, cryptocurrencies are treated as property for tax purposes and gains or losses are subject to capital gains tax. In Japan, on the other hand, they are treated as a form of payment and subject to consumption tax. Work with your tax advisors on this to ensure compliance with tax laws.
- Cybersecurity and fraud: This is a mixed picture. Cryptocurrencies have inherent security strengths but remain vulnerable to cyber attacks. Robust cybersecurity measures are a must, of course, but CFOs can also aim for greater transparency and security in transactions. Blockchain technology can be a secure and tamper-proof way to store sensitive data like financial records, cutting out intermediaries and minimizing the risk of fraud.
From my perspective, the crypto thaw is taking us towards a mixed fiat/crypto future and a golden opportunity for CFOs to embrace blockchain's power to streamline operations, spur innovation, and attract a profitable customer base. Be an early pioneer in this new financial frontier, and position your business for future growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.