Cryptocurrency is quickly becoming more prominent and edging further into the mainstream, rather than simply being for those with specialised expertise.
This shift is so substantial that Gartner predicted 20% of large companies will use digital currency for payments by 2024. CFOs must therefore consider how processes and structures within their organisation will change as a result. It seems inevitable that they will have to implement it as part of their financial strategy.
In this article, we explain what cryptocurrency is and how it works, while highlighting the pros and cons of using it. We also discuss how businesses are using cryptocurrency and whether it is time for modern finance teams to embrace this technology.
What is cryptocurrency and how does it work?
Cryptocurrencies are essentially digital currencies. The term ‘crypto’ is used as they are protected by cryptography, which makes them particularly difficult to copy.
Cryptocurrencies can either be mined or purchased. Mining involves using a computer to solve complex equations to unlock a block of coins. However, a lot of time, money, and energy is required to do this, which is why it’s only really accessible to businesses or large groups of people.
Bitcoin is by far the most popular cryptocurrency. Despite this, it’s not yet widely accepted as a method of payment. However, due to their increasing value, cryptocurrencies have become a sought-after commodity and trading resource.
These digital currencies operate within a decentralised system, which is one of their most telling characteristics. They’re not tied to a centralised authority such as a bank or government.
The terms ‘blockchain’ and ‘cryptocurrency’ are often used synonymously, but they’re not the same thing. The blockchain is the public ledger on which all cryptocurrency transactions are recorded. Buying and selling wouldn’t be possible without the blockchain.
Cryptocurrencies are often broken into two types:
- Coins
As mentioned, Bitcoin is the most well-known coin, and was the first cryptocurrency. There are also altcoins, which are essentially any coins that are an alternative to Bitcoin.
- Tokens
Tokens are digital assets that reside on the blockchain. These often consist of utility tokens and security tokens.
There are also NFTs (Non-fungible tokens), which have become increasingly popular. An NFT is a record of a digital asset owned by a person (such as a piece of digital art).
The most popular cryptocurrencies are:
- Bitcoin
- Tether
- Ethereum
- Binance Coin
- USD Coin
- XRP
- Cardano
How is cryptocurrency used in business?
More businesses are embracing cryptocurrency, and it’s not just large organisations. Many SMEs are now getting onboard with this digital revolution. Although admittedly, these businesses are outliers, and there is some way to go before it becomes fully mainstream.
This doesn’t mean that CFOs should ignore this trend though. We’ve seen in recent years how quickly financial changes can take place, and they’ve already had to contend with the shift towards Cloud technology, automation, and other forms of AI.
Failing to embrace this financial innovation would potentially see their business get left behind by competitors.
Cryptocurrencies can add extra value to the financial operations of an organisation, and serve as an additional method of payment. They’re also an effective way to store wealth (like owning a physical commodity) and can be used as leverage in negotiation or investment scenarios.
Large companies that invest in cryptocurrency naturally tend to hold large reserves of cash too, which can negate many of the associated risks.
CFOs have several challenges they’ll need to overcome as digital payments become normalised. They’ll have to persuade other members of the C-Suite to get onboard, as they may be reluctant to make the jump.
Additionally, they will have to contend with the fact that most people in their finance function will have minimal expertise when it comes to this technology.
Eventually, it may be impossible to conduct business transactions without the use of a virtual currency, as this method will likely be in widespread use once it is more practical.
Even if cryptocurrency doesn’t become the dominant currency for businesses, it will still have a significant economic impact. And other innovations of the same nature will continue to reshape the finance realm.
What are pros and cons of cryptocurrency?
Pros of cryptocurrency for finance departments
- No single point of failure
Cryptocurrencies operate using a decentralised method of payment. There’s no need for banks or financial institutions to govern transactions. This eliminates the possibility of a single point of failure which could otherwise occur. For example, if a bank was to collapse during a financial crash.
- Seamless transactions
Due to the lack of an intermediary, cryptocurrency transfers are faster and more straightforward than a traditional money transfer.
- Reduced costs
Customer and supplier-related payments are streamlined, leading to fewer outdated processes and inefficiency-related costs.
- Increased value
Rather than being static, cryptocurrency can generate a profit for businesses when they increase in value. They have drastically increased in value over the past ten years, which opens a new stream of cash flow for investors.
- Wider pool of customers
It also provides access to a new (and previously untapped) group of customers. These are probably the most innovative group of customers too, making them a good partner to have in the long-term. This portfolio diversification is a good reason for small businesses to invest in a virtual payment infrastructure.
- Happier stakeholders
Vendors are increasingly using digital payments, meaning businesses may need to cater for crypto transactions to keep key stakeholders happy.
- Greater security
Due to the cryptographic element of this technology, a company’s transactions on the blockchain can only be viewed with a unique encryption key. Transactions cannot be deleted from the blockchain once they have occurred, enhancing transparency and reducing fraudulent behaviour.
- Fewer limitations
Cryptocurrency is not limited by the time of day, as the market is operational at all times. This makes it a very accessible method.
- Extended reach
It’s not limited by borders either, making it a great system for global companies. The currency is not linked to a single country, and there are fewer worries about exchange rates or other fees.
- Less vulnerable to economic climate
As it’s not tied to a single nation, it’s not bound to a particular economy either. Cryptocurrency is capped in terms of the amount that can exist, so it’s less affected by aspects such as inflation.
Cons of cryptocurrency for finance departments
- Unstable market
Despite the previous point, digital currencies can still be extremely volatile due to fluctuations in demand. Crypto markets are influenced by world events, so investors must have a keen eye for changes that will affect the value of their investment.
- No regulations
Investors aren’t protected by legislation or regulations as there is no central governing body. This means there’s not much that can be done if they’re exposed to illegality.
- Lack of widespread use
The transition to a virtual payment structure is a slow one, meaning it’s still not widely accepted. Those using this method may have to convert their crypto into regular currency for some transactions (which is time-consuming).
- Criminal activity
Many scammers will take advantage of people's lack of knowledge to trick them into making investments. Currency can be hacked or stolen, and crypto transactions are anonymous (making it difficult to trace them back to a specific person).
- Difficult to understand
Those that aren’t used to digital methods may find it difficult to comprehend due to the sheer scale of change. It represents a risk to invest in something you’re not fully familiar with too. The regular stock market is tricky to navigate, but cryptocurrency has an extra dimension of technological complexity.
- Unclear outlook
Even though cryptocurrencies are gaining traction, they’re still very young, and don’t have the long-established foundations of other financial institutions. This makes them particularly vulnerable to impermanence.
- Threat of hackers
Investments can be lost if a virtual transaction is hacked. The blockchain is known for being secure, but this doesn’t mean it’s completely impenetrable. Measures can be taken, such as using a crypto wallet and keeping private keys in a secure place. But newcomers may be prone to overlooking certain safeguards.
Should CFOs embrace cryptocurrency?
CFOs will have a plethora of new challenges to manage if they embrace cryptocurrency. They must decide how digital transactions will be presented and monitored on balance sheets.
They will also need to consider how developments related to this technology will impact their ongoing activities. Other methods and currencies could emerge, so they must be open to an array of opportunities.
The role of the CFO has evolved dramatically in recent times. This will add another layer for them to manage, while balancing their existing obligations. It’s wise to come up with a dedicated strategy so that they’re prepared for this inevitable shift.
Finance leaders must think about infrastructural and organisational changes that will accommodate these innovations. It's likely that the speed of crypto adoption will increase as central authorities take them ever more seriously.
CFOs may not be comfortable with the idea of embracing cryptocurrency transactions immediately. But forward-thinking leaders will at least familiarise themselves with them, as this trend isn’t going away anytime soon.
At Advanced, we help CFOs to unlock the potential of their finance department through the power of technology. Our Cloud-based accounting software, Advanced Financials, boosts efficiency by automating many accounting processes. This gives finance teams more time for value-adding work. Future-proof your business by embracing digital transformation.