A CFO’s Quick Guide to Cryptocurrency

In short:

• Cryptocurrencies may seem like a distant digital disruption for enterprises, but they could soon become the payment method of choice for many B2B customers, suppliers, employees and even national governments.
• Legal and regulatory clarity is improving quickly, with central banks in more than 80 countries developing blockchain-based digital currencies.
• CFOs must be ready to add cryptocurrencies to their balance sheet and asset strategy as crypto becomes more efficient and trusted.

Gartner predicts that by 2024, at least 20% of large enterprises will use digital currencies for payment, stored value or collateral, despite the fact that 84% of surveyed finance executives say that, due to its volatility, holding Bitcoin poses a financial risk. This illustrates the challenge for CFOs as they manage this disruption to current financial networks and business models. 

The cryptocurrency market is now worth around $2 trillion, which is more than the amount of U.S. dollars currently in circulation. Nation states and public and private companies own nearly $30 billion in Bitcoin alone (it was the first and remains the most prominent digital currency). Most traditional financial services now exist for crypto as they do for hard currency (savings accounts, borrowing, lending, asset management, etc.). 

Governments that regulate fiat currencies — those not backed by a commodity — are increasingly looking to set guidelines for the responsible use of cryptocurrencies. The White House, for example, has laid out a national policy for digital assets across six areas: consumer and investor protection, financial stability, illicit finance, U.S. leadership in the global financial system and economic competitiveness, financial inclusion and responsible innovation. Central banks in more than 80 countries are developing blockchain-based digital currencies.

“Small and large corporations, investors and financial institutions are asking more and more questions about how to prepare their treasury and accounting functions for the use of cryptocurrencies,” says Alexander Bant, Chief of Research at Gartner. “Some companies are playing defense in case a major supplier or nation moves to using Bitcoin. Others are playing offense to show customers, suppliers and employees they are ahead of the curve when it comes to holding and accepting cryptocurrencies.”

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What is cryptocurrency?

Cryptocurrencies are peer-to-peer versions of electronic cash that allow online payments in real-time between parties, without intermediaries such as financial institutions and central bank clearing houses. Cryptocurrencies are “mined,” traded, distributed and stored on an immutable blockchain ledger. 

The blockchain captures and records information that participants in a network need to interact and transact. Blockchain records are unalterable, time-stamped, encrypted and linked to each other in blocks, where each block is a cluster of roughly 1,500 transaction records in the case of Bitcoin (other ledgers vary in block size). The ledger grows as participants transact, and roughly seven transactions are processed every second (for Bitcoin; other ledgers vary in throughput scale). 

Blockchain and cryptocurrency are often incorrectly conflated. While blockchain’s recorded event could be a monetary transaction, it could also be an exchange of information, such as metadata attached to records like medical history or other digital assets or tokens. Blockchain is also the technology foundation for non-fungible tokens (NFTs), which will increasingly be used to bridge online and offline worlds in the peer-to-peer age of Web3 and the Metaverse. 

Read more: Your Quick Guide to Blockchain

What’s unique about the value of cryptocurrency?

Digital currencies are evolving how we transact and do business with each other. And, they meet all the requirements of a viable currency:

1. Scarcity: The total number is capped by an algorithm in the source code. The maximum supply of Bitcoin is 21 million, and other coins are limited in nature as well.
2. Durability: It can be used repeatedly.
3. Portability: You can carry around wealth on a physical storage device or transfer it instantly online.
4. Divisibility: It can be divided into smaller denominations. 
5. Fungibility: It’s uniform and interchangeable.
6. Acceptability: Bitcoin, specifically, is recognized and accepted as payment for goods and services by business. Other cryptocurrencies are gaining traction, too.

Public firms that have chosen to hold a cryptocurrency on their balance sheets believe it may be a better store of long-term value than fiat currency such as national currencies. Some cryptocurrencies are also seen as a hedge against inflation. 

“Demand is still nascent, but a growing number of firms are holding crypto and not using it yet for payments or conducting business," says Bant. "Even mainstream companies and social networks such as Twitter are beginning to accept digital currency payments as they seek to satisfy emerging needs. We also know that companies such as Walmart, Google, Visa and J.P. Morgan Chase are hiring experts in the blockchain and digital currency spaces to prepare for this shift.”

What does blockchain mean for the finance organization?

Blockchain solutions can add value by digitalizing manual processes or enabling more efficient information exchange in multiparty transactions. The finance function can leverage blockchain to make trade, compliance and finance operations more efficient and less costly. 

In particular, blockchain can:

• Improve trust and be verified: Thanks to the encryption technology, the positives go beyond efficiency and dollar cost-savings.
• Reduce transactional finance costs: Streamline flows of payments to and from customers and suppliers.
• Reduce payroll costs: Over time, employees may request compensation in a cryptocurrency. Compensation payments to employees may become more seamless.
• Reduce legal costs: Smart contracts could automate payments once an obligation is fulfilled, including providing legal proof of deed or rights.
• Audit supply chain: Manage complex, fragmented, distributed supply chains across organizational and geographic boundaries, especially for fraud prevention. Verify the veracity of the origin and path of product components.
• Manage physical or digital assets: Permissioning, access and identity verification related to control of physical or digital assets.
• Record internal transactions: Help large, complex organizations reconcile multiple databases intracompany and track cross-charges, providing a single source of truth.
• Reduce audit costs: Use it as an automated and standardized way of audit, which can minimize and mitigate the chances of any biases affecting the audit’s outcome.

Watch Gartner experts discuss: Finance Technology Innovations for 2022

What does cryptocurrency mean to finance?

Cryptocurrencies and other forms of digital currencies can add value to financial systems. Organizations can use them in one of three ways — as:

1. Stored value akin to digital gold
2. A new type of payment currency
3. Collateral for leveraged investments and financial activity

However, transacting in cryptocurrencies entails many risks, ranging from volatility to lack of legal protection and regulatory uncertainty in most countries. The price volatility can’t be ignored. Plus, there is not a universal agreement on the precise accounting treatment of cryptocurrencies. 

Currently, cryptocurrencies are considered intangible assets that are recorded at cost. This means their value can be reduced on a balance sheet over time, which might not accurately reflect the economic value to a company if the cryptocurrency is held as an investment and rapidly appreciates in value. It’s worth noting that large organizations that hold cryptocurrency on the balance sheet accept this volatility and tend to have an abundance of cash. 

CFOs must also consider other issues, including the fact that board directors are wary of the risk of cryptocurrencies, adoption as an accepted form of payment or exchange remains slow and regulation is still developing. Most finance organizations also lack the skills and knowledge to hold cryptocurrency.

What are the impacts of the Russian invasion of Ukraine on cryptocurrency?

Commercial and central banking systems across the globe have shut their doors to sanctioned Russian entities in response to Russia’s invasion of Ukraine. Even if Russians turn to cryptocurrency networks to try and safeguard their money, the market in Russia isn’t sizable enough to take the sting out of large-scale sanctions. Governments, already keen to pursue criminal activity using crypto, are also likely to try to find crypto wallets held by sanctioned individuals who could use them to transfer their wealth out of Russia.