Seventy-six percent of business executives now believe that digital assets will become an alternative to or replacement for fiat currencies within the next 5-10 years. And Gartner predicts that 20% of enterprises will be using cryptocurrencies within the next two years. Any doubt that cryptocurrencies will play an important – if not central – role in corporate finance is fading fast.
There are two likely futures for enterprises. In one, cryptocurrency will slowly take over from fiat and eventually replace it. In the other, businesses will use both crypto- and fiat currencies to meet the differing needs of customers and suppliers. In either scenario there will be a transitional period where CFOs and Treasurers will need to manage both types of currency across the full spectrum of payments, trading, custody, and yield requirements.
Integrating cryptocurrency into corporate finance represents a challenge for finance teams as it requires significant alterations to their banking and payments infrastructure. However, thanks to digital-native financial service providers, a new breed of banking platforms are emerging that leverage APIs to make it easy for finance teams to integrate cryptocurrencies. These platforms are the core banking infrastructure of the future, and will enable faster, more flexible and lower cost banking and treasury options for enterprises.
All this will be possible thanks to the underlying technology of cryptocurrencies: blockchain. As a distributed ledger of transactions, blockchain decentralises financial transactions and increases transparency, helping to build trust. The technology also means that banking platforms can structure financial services and transactions more efficiently by removing the need for rent-seeking middlemen. These characteristics of blockchain, and by extension cryptocurrencies, will underpin new and compelling digital banking services. Here's just a few of the ways that the technology promises to disrupt corporate baking.
Faster payments at lower costs
Businesses today operate in a highly integrated global context. Multinational businesses not only trade across borders, but also have to manage their finances across numerous global locations. However, when it comes to fiat currencies cross-border payments are fragmented and slow.
The whole area is heavily regulated, which leads to barriers and constraints when sending money between different jurisdictions. Exacerbating this issue is the fact that international businesses are compelled to use a range of payment providers to transact within varying markets. Such businesses must also manage a large number of bank accounts denominated in the relevant currencies they use.
What's more, the SWIFT infrastructure used to carry cross-border payments is showing signs of age. Merchants struggle to get visibility into their payments on SWIFT, and they have to make do with settlement times that can be anywhere between three and five days. The system is also costly, with high fees levied for FX transactions.
Blockchain and cryptocurrencies completely disrupt this model – both for regular payments and cross-border payments and settlement. A service fit for our always-on digital age, crypto rails enable funds to be transferred within just 24 hours to anywhere in the world. And as crypto rails enable payments to be made directly from one account to another, there's no need to pay the fees of expensive intermediaries. International payment providers often take large commissions for their services, but in fact add very little value beyond providing the infrastructure – it's easy to see why crypto rails and digital wallets are viewed as a compelling alternative.
A new approach to credit
In fiat baking systems, a trusted central bank is the final arbiter of credit decisions. Their approach to risk, and the algorithms they use to reach decisions, affects the lives of millions of people seeking credit. Cryptocurrency and blockchain turns this model on its head. By enabling decentralised finance (DeFi), blockchain removed the need for a central bank, instead embedding trust and transparency in the underlying transaction ledger.
When it comes to credit services, the approach is revolutionary. Smart contracts that leverage blockchain enable two or more parties to lend and borrow directly according to prearranged conditions. With DeFi, people with poor credit ratings or unconventional credit histories, and who usually struggle to access credit have a new path available to them. Given the current cost of living, such services can make all the difference to the unbanked population, who may be struggling to get by.
DeFi also promises to transform credit options for small businesses, which can also find it difficult to get funding for projects that are deemed to be high risk by banks and ratings agencies. With DeFi, small businesses can access a new and dynamic source of credit at a lower cost point than with banks, as they do not have to pay fees to the usual intermediaries. DeFi therefore promises to be a new growth engine for small businesses, a benefit that will potentially extend to the wider economy if these businesses grow and thrive.
A higher yield on assets
Today's record-high levels of inflation mean that it's more difficult for businesses to earn money on their capital. Treasury departments are therefore looking at novel ways to invest their money and secure a higher yield than with traditional investments. For many, cryptocurrency is tempting because digital assets often outperform other asset classes - Bitcoin, for example, is the best performing asset of the past ten years.
There are of course market fluctuations with crypto, as we are seeing today, and some treasury departments may not wish to be exposed to this volatility. These organisations can instead lend out their digital assets to hedge funds and other investment firms at a set fee using their digital banking platform. Such investment firms are currently looking to access as much crypto as possible to use in their own investment strategies. Treasurers reduce the risk of these loans by leveraging digital asset custodial solutions, which ensure that digital assets do not leave secure custody and are insured against cybercrime while there.
Streamlining real-estate investments
As with payments processing, businesses looking to invest in real estate using fiat currencies can come up against hurdles – particularly when it comes to cross-border investments. Local laws pertaining to real estate investment vary from region to region, and businesses can struggle to gain visibility into their investments.
Once again, cryptocurrencies can be leveraged through advanced banking platforms to mitigate these challenges. Advanced banking platforms enable cross-border real-estate investments via digital tokens and in a way that is much more transparent and scalable than with fiat investing.
Additionally, the investment itself can be tokenised (i.e., represented by a digital asset on the blockchain). This approach introduces liquidity into otherwise illiquid assets such as property and rent, because the tokens can be broken down into smaller shares. As such, cryptocurrency broadens investment opportunities around real estate.
DeFi is also relevant in the context of real estate, as estate transitions can be refinanced by participants in a DeFi contract (think of it as the "bank of DeFi''). In this approach, DeFi replaces banks in the financing of real estate. And once again, by reducing the need for intermediaries, cryptocurrencies lower the cost of real-estate investing, while also providing a means by which companies can manage risk.
Fiat currencies are not going anywhere, and for the short term will continue to constitute the majority of financial transactions within corporations. However, cryptocurrency will eventually be every bit as important as fiat in corporate finance, perhaps even more so. As the balance shifts in favour of cryptocurrencies, businesses that leverage advanced banking platforms will be best placed to seamlessly integrate crypto into their banking and treasury operations. The organisations will be the first to benefit from empowered, disintermediated, and agile money management at scale, and it won't be long after that the value of fiat currencies will begin to be questioned.
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