Bitcoin’s skyrocketing and subsequent free fall in value should be a wakeup call to CFOs and corporate risk managers. But not for the reason you think.
Corporate CFOs are largely staying away from privately issued alt coins such as Bitcoin, Ethereum, Tether, and others because of their price volatility. While Fundera reports that over 2,000 businesses – including AT&T and WeWork – in the United States accept Bitcoin, none of these organizations are holding cryptocurrencies on their balance sheets. They are converting to fiat currencies daily (or intra-day in some cases) to avoid being caught holding a devalued digital currency.
The remainder of organizations that wish to attract crypto-centric customers use intermediary payment processors such as BitPay who will translate crypto-currency to fiat currencies or gift cards in real-time for shoppers to purchase goods and services. These businesses have similar interests: they are not in the business of digital currencies and don’t want to be risking their hard-earned revenue and cash flow to uncontrolled price movements in the currencies they transact in.
This argument will sound very familiar to any CFO or Treasurer. Their mandate is to minimize the impact of financial risks so investors can be exposed to the business risk and not increases or decreases in earnings due to currencies (digital or otherwise). Digital currencies are hard to protect against because the derivatives market is not fully developed, the utility of cryptocurrencies is limited which reduces the opportunity to construct natural hedges, and the process of converting into fiat currencies is frictional lacking the automation or liquidity that treasury teams have come to expect for standard currencies.
And yet, while all these liquidity and hedging levers exist for finance teams to protect their balance sheets from (fiat) currency volatility, most CFOs aren’t very good at that either. A quarterly study recently reported organizations lost over $9.5 Billion in earnings due to currency headwinds in Q1 of 2021. In the trailing six months, this totals over $16B in lost value. How is this possible?
The problem is not the inability to protect cash flows and assets from price volatility. Unlike with digital currencies, those structures work well for fiat currencies. The issue is visibility. CFOs do not have sufficient transparency into their cash flows and balance sheets to be able to hedge effectively, whether constructing natural hedges and/or going to the derivatives markets. As a result, forecasted cash flows are left unprotected and balance sheet accounts, captured within the depths of their ERP software, are vulnerable to every currency movement.
Fortunately, there are relatively easy solutions to perfect visibility so better data-driven risk management programs can be implemented:
There is certainly similarity in the underlying reasons why the majority of CFOs do not want cryptocurrencies on their balance sheets: they want to be able to remove the uncertainty of price movements. It is ironic that the same CFOs have much work to do to protect the same balance sheets from fiat currencies as well
Note: This blog first appeared in CFO Dive: https://www.cfodive.com/news/crypto-challenges-shine-light-on-cfos-fiat-currency-management/605177/.
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