Cryptocurrency series

#2 What future for crypto-currencies in treasury?

Discover a new crypto-currency article!

Our expert offers a series of articles dedicated to cryptos to address the prospects and opportunities of this digital currency in treasury management systems.

In our first article of the Crypto-currency series, we proposed a debate opposing consideration of the term crypto-currency vs the term crypto-asset, with a balance rather favorable to crypto-assets. In this new article, we explore the possibilities of using crypto-currencies in company treasury to serve two functions: to act as an investment vehicle or a payment tool. Asset class or payment tool, the debate continues…

Asset class, a disparate use according to continents…

As an asset class, the use of cryptos seems limited today. However, the post-pandemic paradigm seems to be quite different depending on the geographic area. Although extremely limited in Europe, crypto transactions are nevertheless well integrated in other continents.

Indeed, in some countries in Latin America, Asia (and to a lesser degree in the United States) some treasurers have looked to implement crypto strategies to maintain the value of their assets. Treasurers are indeed witnessing a drastic increase in the money supply, a galloping inflation, and are thus seeking to protect themselves against this phenomenon. This is the reason why some treasurers did not hesitate to invest in crypto-assets, certainly as risky as they are volatile, but they estimated that it is always less risky to invest in crypto-assets than to keep cash in an environment where inflation rates fluctuate between 20% and 40%, where real interest rates are negative, and where they are therefore assured to witness a rapid decline in its value.

Consequently, the growing appetite for digital currencies – and in particular its flagship value bitcoin – is actually related to the declining value of traditional cash, rather than its intrinsic qualities. However, the storm that is currently affecting the crypto market should certainly dampen the ardor of investors in bitcoin or other cryptos…

In Europe, even though crypto returns have been high during certain periods, they have shown volatility of the same magnitude, and thus remain a generally proscribed asset class within treasuries, with rare exceptions. The treasurer, custodian of cash, must then be cautious and risk averse, while keeping cash at a low risk. The return therefore comes second to certainty and incorporating crypto as an asset class has the opposite risk spectrum to the use of AAA or AA funds (cash equivalent investments) due to the extreme volatility of the crypto. Bitcoin has no intrinsic value and no mechanism to stabilize its value, driving this volatility.

A unique payment method

There are now many use cases for cryptos in business. As an illustration, and indirectly related to crypto-currencies, 2021 was the year that Non-Fungible Transactions (NFT) and the concept of Metavers began to be taken seriously, which precipitated the plunge of companies into these new assets and the technologies behind them. The luxury, video game industry, art, and sport world are all investing massively in these technologies and buying plots in the Metavers or selling NFT that impose payments in crypto-currencies.

One of the most notable incursions into the Metavers came from the luxury market with the highly coveted sale of a virtual Gucci bag for the equivalent of $4,115.

In parallel, Kering, Gucci, and Balenciaga are all investing in the Metavers, and their teams are dedicated, but they are more cautious about accepting crypto-currencies on their online sales websites. Indeed, even if they are not illegal in most jurisdictions, the legal and taxes consequences, current and in the future, must be carefully analyzed.

Contrary to what some might believe, payments in crypto are not reserved for the virtual world. It is now possible to pay in cryptos in some physical Gucci stores in certain big cities in the United Sates, with an extension to all North America planned in summer 2022.

France also seems to want to impose itself on this niche. In Paris, from June 8 to July 8, 2022, you were able to make you purchases in crypto-currencies in the Beaugrenelle shopping center. A first!

Stablecoin, the bridge between crypto-currencies and fiat currencies

Stablecoin, the digital currency indexed on a fiat currency (currency or basket of currencies/commodities) that significantly less volatile than bitcoin, is also making its entrance.

To facilitate this indexation, two methodologies are used today:

  • algorithmically, though the recent brutal collapse of Tera USD has demonstrated the limits of this method, or
  • with a guarantee in the form of a collateralized fiat currency equivalent.

In France in particular, the Casino group recently launched its stablecoin, called Lugh, where each Lugh € is backed by a € equivalent held in a Société Générale account. The objective of the approach is to use the Lugh not only as a means of payment but also a loyalty program. The technology carried by digital currencies allows potential use of smart contracts that offer the possibility of including a software program within the currency itself that performs predefined tasks. It offers a great simplification over a traditional loyalty program or Cashback program (that requires a heavy administration) as well as an interoperability of the loyalty program between the different brands of the group, thanks to the blockchain.

e-Yuan, towards a Chinese digital currency

China seems quite determined to deploy a Chinese digital currency. Indeed, the e-Yuan aka the e-CYN made its entry on the Olympic 2022 site, a sign that the Chinese government intends to develop the use of this currency.

Since then, the big groups see the imminent arrival of digital currencies from central banks, which should have a profound impact on the business. From now on, retail chains present in China will have to manage payments with cash, credit card, debit card, or e-Yuan.

Towards a new currency for the corporate treasury

In the end of the day, treasury should consider crypto-currency for what it was intended to be – a payment vehicle and in rare cases an asset class. Thus, if a company accepts crypto as a means of payment, it instantiates as a new currency for the treasury, which can then be hedged into the company’s functional currency, eliminating the exchange risks, just like any other currency.

Some FinTech’s have already understood this and are able to provide instruments to cover exposures, heralding a bright future for crypto currencies. In addition to potential cost savings, these technologies offer almost instantaneous turnaround times. The use of crypto-currencies as a means of cross-border payment thus constitutes a real opportunity.

And yet… Crypto-currencies, a still uncertain future!

All sizes of groups are now using crypto-currencies as payment methods, and some payment services providers, such as PayPal, have begun to accept them, allowing many merchants to take advantage of this opportunity.

On the other hand, despite the general enthusiasm, the future of crypto-currencies still remains uncertain, as many governments seek to temper their growth, whether through regulatory restrictions, or by simply banning their use.

So, can we expect regulation and a Central Bank digital currency? To be continued in our next article in the “Crypto-currency” series!

About the Author

Frédéric Saunier, Chief Executive Officer

With over 25 years of expertise in financial services, Frédéric Saunier advises Diapason’s clients on the digitalization of their financial departments. As an expert in Artificial Intelligence, Blockchain, Financial Flow Security, and Sustainable Development (ESG), Frédéric shares his knowledge through his articles.

Frederic Saunier

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