Why business transactions are moving towards digital naming
Last week, Cash and risks engaged in a conversation with Alexander Bant, head of research at the Gartner Finance practice, about why his firm predicts that 20% of large companies will use digital currencies by 2024. Bant explained how the combination of smart contracts, blockchain technologies, and digital currencies have the potential to reduce or even eliminate human touch in the procure-to-pay process.
Although Gartner does not yet see companies using digital currencies in this way, many are beginning to learn about the implications of integrating digital currencies into their operations. This week we continue the conversation.
Cash & Risk: Beyond the increased staff efficiency we talked about last week, what are the other benefits for businesses of implementing automation throughout the procure-to-pay cycle?
Alexander Bant: A potentially significant advantage relates to the area of fraud. North American companies that deal primarily with the Fortune 500 may not see a lot of fraud happening with corporate contracts. But once you go beyond that and start talking about overseas entities, and start considering the geopolitical conflicts that can arise, access to digital money that doesn’t fall under of the jurisdiction of any governmental entity can enhance your confidence in the operations of a business.
T&R: And why are digital currencies less vulnerable to fraud than transactions denominated in other currencies?
A B: Well, I should preface this answer by saying that an employee, customer, or vendor who really wants to defraud the organization will always find a way to up their game, no matter what technologies or tools the organization puts in place. ‘business.
That said, if the business uses a blockchain where transactions are permanently recorded on a blockchain ledger in a certified format that cannot be changed, the money transfer is forever verifiable. It adds a level of transparency that we don’t have today with the movement of money. Hopefully, this would make bad actors think twice before taking malicious action against the organization – and if they were to go ahead anyway, they would be caught almost immediately if the transaction was certified on the blockchain.
T&R: Makes sense. I would also like to go back to another benefit of cryptocurrencies that you mentioned last week: you suggested that putting corporate funds in crypto could protect companies against inflation. But cryptocurrencies are notoriously volatile. Have you argued that because cryptocurrencies do not move with fiat currencies, their value does not necessarily reflect inflation and other trends that may be prevalent in the global economy?
A B: It depends on the cryptocurrency we are talking about and how it is designed. Most of them have a limit on how much can be mathematically produced, unlike money printed by central banks and governments around the world. The restricted nature of many cryptocurrencies means that the value is potentially less eroded over time than that of fiat currencies. But this is hypothetical; cryptocurrencies haven’t been in the field long enough to be studied through the ebbs and flows of an entire business cycle and a cycle of changes in the money supply.
T&R: What other benefits do you expect from businesses by adding digital currency options to their payment, investment and/or receivables processes?
A B: Well, another potential benefit that I see, in the medium term, of a business becoming more crypto-friendly is that trading in crypto, or having digital currencies on the balance sheet, can change the mindset of employees. We’ve heard this from CFOs: workers seeking a more digital company culture will gravitate towards companies that are leading the way in digital money.
An organization that is ahead of the trend in activating this infrastructure may be able to access different labor markets and talent pools. Michael Saylor says investing in bitcoin has been a game-changer for MicroStrategy in terms of the ways the company interacts with incoming and current talent. Having this commitment to the move to digital currency really helps MicroStrategy keep employees engaged in the future of the organization.
T&R: Central bank digital currencies [CBDCs] offer corporate treasury teams the same benefits as private cryptocurrencies?
A B: Without seeing the actual infrastructure behind a specific CBDC, it’s hard to answer. Until now, nine countries have launched digital currencies, while 15 others are piloting them and 16 are developing them. And then 40% of the remaining national governments are in the research phase. This is where the United States is: in March, the Biden administration issued an executive order stressing the urgency of research and development. [R&D] in the technological infrastructure needed to support a Federal Reserve digital currency.
Rather than replacing current forms of currency, a CBDC will aim to provide more control over the nation’s money supply through more targeted payments and monetary policy. It will be able to protect consumer privacy and more rigorously prevent criminal activity. The CBDC will need to build the trust behind the ledger, so it could resemble cryptocurrencies like bitcoin. But it probably won’t be as open and transparent. It will be certified under different mechanisms and will probably have very different characteristics under the covers because it is owned by the government.
T&R: How do you think the landscape of CBDCs and cryptocurrencies will evolve in the next few years?
A B: It’s interesting. We have overcome a big hurdle globally over the past few years, whether digital currencies (bitcoin, Ethereum and others) will be allowed. Can they be delivered? Can they be mined? Can they be detained? Can they be exchanged? These were strangers. But now, nearly 100 of the world’s largest nations have said, one way or another, how they see this evolving.
India is a no, but most of the world is in favor of using digital currencies. Cryptocurrency is now legal in most of the European Union, although member states are implementing their own regulations. Thus, a patchwork emerges of temporary and incomplete regulations around the world.
T&R: What are the main areas where different jurisdictions have different approaches to regulating cryptocurrencies?
A B: The spreads mainly focus on how they classify digital currencies. Many regulatory bodies classify digital currencies as property. And most of the regulation currently focuses on miners and trading, because that’s where most of the activity currently takes place. But over the past six to nine months, we’ve seen a lot more talk about KYC [know your customer] rules and the impact of digital currencies on anti-money laundering governments [anti-money laundering] efforts.
And then, of course, many governments are looking at how they can tax digital currencies as they trade and move. In addition to calling for R&D on a possible digital dollar, the March White House executive order sets out a national policy for digital assets with respect to consumer and investor protection, financial stability, national security and competitiveness, and financial inclusion.
So, governments are trying to clarify their approach to cryptocurrencies as well as CBDCs, but if you talk to CFOs, the frameworks, guidelines, and regulations still seem temporary for the most part. They don’t yet feel institutionalized in the way we do business.
T&R: So what should corporate treasury and finance teams do today to prepare for the future of digital currencies?
Read Bant’s answer in part 3 of this article, which will be published next week.