Corporate Treasury & Crypto Currency

Commentary

What are the benefits of crypto currencies for corporate treasurers?

In this discussion, we received a resounding answer: very little, to none - at least for the time being:

In our poll [report here], 8% of respondents have actual applications either up and running or in the detailed planning and implementation phase. 81% expressed varying levels of interest, with only 11% reporting no interest. However, 93% said they didn’t know enough about the topic. Our discussion very much bore this out: two peers had actual projects under way, while the rest either wanted to learn more, or were looking – unsuccessfully, so far - for use cases.

There is a lot of pressure to adopt some form of crypto. But, in practical terms, the rare cases where a customer insists on paying in crypto can be handled by using a PSP (Payment Services Provider) to convert the crypto into the desired fiat currency. No-one is anxious to win the race to be an early adopter: everyone is happy to finish second, or lower. Races where no-one wants to cross the finish line first can take a long time…. 

So - how do we get to the finish line, and what is the benefit of crypto? 

In these summaries, we report what the peers say, with minimal editorial comment. In this case, CompleXCountries does have an opinion, especially on the benefits: we will be publishing this soon in a separate piece in our Opinion Corner section.

In any case, for corporates, crypto is rapidly moving away from being an alternative to fiat currencies for holding and preserving value: this is the motivation behind bitcoin, which remains too volatile to fit in with most corporates’ investment guidelines. Instead, it is coming into its own as a payment mechanism: the call was full of the current jargon: “payment rails” and “on-“ and “off-ramps”.

Using digital currency for payments could make settlement processes significantly cheaper and more efficient: our peers discussed possible savings on credit card merchant fees and FX spreads – but these seem to be in the distant future. It should also enhance cash and liquidity management by eliminating clearing systems: this seems to be a nice to have. 

There is a debate, not reflected here, about privately owned tokens, especially stablecoins, backed by holdings of the fiat currency to which they are tied, and CBDCs (Central Bank Digital Currencies). No peer mentioned the digital euro, which aims to launch between 2027 and 2029. In theory, at least in Europe, this should eliminate the need for on and off ramps.

Points raised:

• Every peer is involved in an increasing number of discussions on the subject. Several joined the call simply to learn more about it.
• The more immediate applications tend to be in the B2C space: B2B payments usually use payment rails with higher values and lower costs, at least as a percentage
• Similarly, in FX, peers recognised the potential to eliminate correspondent banking, and therefore reduce spreads – but this is mostly outside their control
• One peer commented that the need to use on and off ramps adds costs at both ends of the transaction – this will likely reduce the net benefit
• Countries like Argentina present a lot of friction and low volumes. This is a case where a stablecoin could potentially eliminate a lot of manual processing.
• National clearing systems and cut-off times should disappear with a purely digital system. This will enhance global cash management – but not soon.
• Even though it is not strictly linked, several peers showed interest in tokenisation, especially for investments. Tokenisation can make the process more efficient for short term investments, especially if linked with a digital currency. Reducing the ticket size makes it easier to access retail investors. In one case, it was being used to allow low paid workers to earn interest on their balances as they accrue during the month.
• Several peers commented that this was a generational issue: younger employees seem to be more comfortable with digital payments, and may well prefer digital wallets to fiat currencies, given limited trust and confidence in current governments.
• Under pressure from their board, one peer took this argument a step further: given increasing government deficits, more commentators are discussing the possibility of a global debt crisis, potentially accompanied by a crash of the US dollar and the euro. In this scenario, crypto currencies could offer more security – though, for stablecoins backed by, and tied to, a fiat currency this could become a circular argument.
• Inertia is a big factor: one peer pointed out that all the current payment rails, investment delegations and risk management practices are well tried and tested, and systems have been built around them. Any change involves cost and risk: the benefit has to be significant to justify this. 
• Going via PSPs raises inevitable issues with counterparty risk. Several peers see this as an obstacle which must be overcome before higher values can be processed.
• One peer with significant volumes of sales being settled in crypto finds that, on average, customers using this settlement method spend 25% more than those who use fiat currencies. They are happy to grow this business.

Many view crypto as a way of getting round regulations: it has often been associated with money laundering and criminal activity. The two cases where peers are actively adopting it both have a regulatory angle. The companies are scrupulously compliant, but they work in areas where regulators have little regard for business needs. 

• One peer has business activities which are not sanctioned, but which involve countries which are subject to sanctions. This is a common issue: some products and activities, such as healthcare and pharmaceuticals, are specifically exempted from sanctions, while the list of sanctioned countries is not the same from one jurisdiction to another. Many peers find it is very difficult to execute – perfectly legal – transactions because banks are simply not willing to invest the time it takes to check these payments, or take the reputational and regulatory risk if something goes wrong. Crypto can offer a solution – at least, as long as the crypto providers are not regulated as banks, and as long as the off ramp into a fiat bank account works.
• Some countries with exchange controls allow the use of crypto for foreign settlements. Even where they do not, it can be difficult to apply the controls in the same way as for fiat settlements. Even where there are no exchange controls, crypto, especially stablecoins, can be viewed as less volatile and easier to use than a local currency subject to a high rate of inflation. This is the case in several more difficult markets in Asia and Africa.

Bottom line: the time for digital currencies is drawing closer. There are still many obstacles to overcome: most treasurers see the potential for reducing cost and increasing efficiency in payment processes. While some progress is being made, there is still a long way to go.

For the time being, customer demand for crypto payment is small in most situations. Where it exists, it can easily be handled by using PSPs to convert any crypto payment into fiat currency. The current payment processes may be expensive and inefficient – but they work, so there is no rush. If it isn’t broken, why fix it?

So – the new technology is coming, but it has not yet taken over. Not so long ago, no-one needed a mobile phone.