How can treasurers use cryptocurrencies?

As one all-time high in its value rapidly succeeds another, bitcoin’s rise in value has been nothing short of meteoric this year.  On August 17, the digital currency charged past the $4,400 barrier, meaning that its total value went above that of payment giant PayPal.

The currency is moving out of the realms of the dark web and into the light as it becomes increasingly accepted in the main stream. There are several benefits to treasurers using cryptocurrencies. These include avoiding paying large transactions fees to banks, immediate payments and the ability for transactions to be kept open or private, so the business interests can be still followed.

If cryptocurrencies are to enter widespread usage by businesses they must demonstrate superiority over current payment technology, such SWIFT, in security, speed or scalability. But as new cyrptocurrencies and blockchain systems, the technology cryptocurrencies rest on, are being brought to market at a rate of knots, it seems like this is could soon be a reality.

Cryptocurrencies will gradually creep into corporations as finance departments receive inquiries from suppliers or partners asking, “Can we pay your invoice in Bitcoin?”, predicts Gabriel Dusil, co-founder of blockchain technology incubator Adel.

“As Bitcoin moves into the mainstream in the next three to ten years, then inquiries will follow. Bitcoin will be just another method of commerce to settle transactions,” he argues.

“If the leaders of corporations can address the cultural challenges and effectively implement change management, then their world opens to a paradigm shift in thinking”

Cryptocurrencies provide businesses with the ability to move assets outside of the normal banking regulatory framework, explains David Putts, chairman and managing director of Billon, a Polish fintech that encrypts everyday currency.

You can see the benefit of this when it comes to foreign exchange. “Cryptocurrencies can definitely help treasury manage foreign exchange (FX) risks. You can use blockchain to do real time hedges in FX,” Tim de Knegt, treasurer and manager of strategic finance and treasury, Port of Rotterdam tells GTNews.

Putts argues: “Some banks are enticed by the potential operational benefits of using the secure messaging technology behind a cryptocurrency, but as the technology is linked to the cryptocurrency, banks have to trade off the operational benefits that the technology may provide against the added cost of needing to buy and sell a cryptocurrency to make a transaction,” says Putts.

“Therefore, the benefits are low when dealing with efficient ‘corridors’ such as USA and Europe, but higher when transacting with Zimbabwe,” he adds.

A threat to the status quo

There is something undeniably anarchistic about cryptocurrencies, which has made some financial institutions reluctant to embrace them and adds to both the bitcoin opportunities and risks. This is not because it has a reputation for being used by criminals, due to transactions being anonymous.

The anonymity of cryptocurrencies is a common misunderstanding. The technology they are based on – blockchain – permanently retains all information attached to any transaction. If law enforcers have adequate technical expertise, the associated data can create a forensic trail that can suddenly make a criminal’s entire financial history public information. This is how the Federal Bureau of Investigation (FBI) arrested Ross Ulbricht in 2013, a 31-year-old American who created Silk Road, a bitcoin cryptocurrency market facilitating the sale of $1bn in illegal drugs.

There are other ways that the use of cryptocurrencies challenges the status quo – businesses no longer need to use mainstream financial regulatory frameworks. “Some aspects of blockchain (the technology that cryptocurrencies are built on) ideology conflicts with corporate culture,” says Dusil.

“[It] advocates decentralised governance where corporations want to centralise that function,” he adds. Blockchain technology also brings up questions of open source versus proprietary solutions; public versus private data; open versus encrypted data.

“It’s all about finding a niche where blockchain can shine. If the leaders of corporations can address the cultural challenges and effectively implement change management, then their world opens to a paradigm shift in thinking,” argues Dusil.

Banks are shedding their reservations

Some banks are leading the way in this shift. In the last month, several of the world’s central banks are overcoming their reservations and have recently come out in favour of the cryptocurrency.

In its latest budget in May, the Australian government agreed that bitcoin would be treated as money in Australia instead of an intangible asset from July 1, exempting the virtual currency from goods and services tax and ending the double taxation of bitcoin trading that was previously imposed during transactions, firstly on the product being bought and then on the bitcoin itself.

The Czech National Bank outlined its attitude to bitcoin and other digital currencies on its website. It argued that bitcoin was “negligible in its size and scope” and that banks have no reason to fear either.

A relentless advance

Whether this currency will continue to be negligible in size remains to be seen. Bitcoin’s relentless advance hasn’t been upset by a new version of the cryptocurrency – dubbed bitcoin cash – being spun off earlier this month in reaction to plans for speeding up trade execution times.

The so-called ‘bitcoin fork’ – an ideological clash that saw a subset of the currency’s community breaking away from the software it employs – was expected to detract from bitcoin’s value. Fat chance: it seems only to have provoked its further dramatic expansion.

The fast-paced tech world is seeing a high-level amount of innovation around digital currencies and the blockchain technology they sit on, meaning the scope of cryptocurrencies is expected to grow.

One example of this is Ardor. It is a cryptocurrency built on a new a blockchain-as-a-service platform that bypasses a lot of the common issues when creating a blockchain ecosystem as well as securing it with enough nodes. It uses features such as decentralised phasing, voting, and trading.

“The benefits are low when dealing with efficient ‘corridors’ such as USA and Europe, but higher when transacting with Zimbabwe”

Not only can this currency be bought and sold but it also operates as a scalable blockchain platform that can be used by businesses.

“Ardor can be easily adapted to support any blockchain based application. Being written in Java makes it especially corporate-friendly and simple to extend,” Lior Yaffe, Ardor’s core developer and senior developer and managing director of tech firm Jelurida, tells GTNews.

One of the key benefits to making business payments using cryptocurrencies is that it cuts out banks in the transaction completely, avoiding large transaction fees. Payments can also get transferred immediately anywhere in the world.

While transactions are generally free, conversions between fiat and cryptocurrency are not. These are often not included in the bitcoin exchange rates shown on bitcoin exchnage rate charts.

As of March 21, 2017, Coinbase, a mainstream digital asset exchange website, announced conversion fees will be paid by customers. “Fees will be assigned dynamically based on the current network conditions and will be paid by customers when they send an on-chain transaction. Transactions between Coinbase accounts will continue to be off-chain and free,” states the cryptocurrency exchange website.

The base conversion fee when using a debit or credit card is 3.99% for North America, Australia, Europe and the UK, for example.

Putts is the chairman of Billon, a Polish e-money transfer start-up which allows customers to transfer money, withdraw cash from a cash machine and pay bills by mobile. He argues Billon has a solution more cost-effective than bitcoin cryptocurrency.

“We are reducing bank transfer costs to 0%. This means those that were previously financially excluded can now be included,” he tells GTNews.

“When using cryptocurrency, people haven’t completely eliminated the costs. They have reduced it. With a cryptocurrency system, you can directly move money around the world which is great but the fundamental challenge is that you need a who ecosystem built to manage cryptocurrency,” he argues. For example, bitcoin has hundred of computers around the world that are “bitcoin mining” and all of them require bitcoin mining hardware.

 

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