The Evolution of FX and the Role of e-Currencies

The last 50 years have brought several major changes to the world’s currency landscape. In 1971, the Bretton Woods System was terminated, meaning that the value of the U.S. dollar was no longer pegged to gold. Other milestones included the merging of the Deutschmark and the East German mark following the 1989 collapse of the Berlin Wall, as well as the introduction of the Euro in 1999.

The forthcoming arrival of e-currencies is likely to be a change on par with these developments in terms of the impact on the world’s monetary system. To date, so-called cryptocurrencies, such as Bitcoin and Ethereum, have acted as frontrunners in this shift, albeit ones that also carry some negative connotations. Ripple and Libra, meanwhile, are worthy ideas that are taking technology to the next level and are helping to make an antiquated system more efficient and effective from both a timing and pricing perspective.

In the longer term, it’s possible that none of these particular developments will stay the course. But what we do know is that electronic currencies will be a fact of life in the near future. Indeed, governments around the world are already paying significant attention to this topic: a survey published last year by the Bank of International Settlements (BIS) found that 70% of central banks are researching central bank digital currencies (CBDCs). 

While this topic is the focus in markets including the U.S., Europe, Switzerland, Russia and Venezuela, the first mover is likely to be the People’s Bank of China. In 2020, China is expected to begin issuing the “e-yuan” based on distributed ledger technology via commercial banks, as well as via Tencent and Alibaba’s Ant Financial. 

Preparing for the Arrival of e-Currencies

The arrival of e-currency is likely to bring significant changes to the world’s monetary environment. An e-currency will be cheaper and more efficient than traditional currencies – but it will also bring significant challenges from a regulatory point of view. 

For corporate treasurers, it is therefore essential to understand what this major change will mean for their companies and how they manage risk. To do this, treasurers need to have both better data and confidence in that data. And automation and agility are also essential ingredients for treasurers seeking to navigate this changing landscape. 

Where treasurers are concerned, one interesting question is how the arrival of a faster, more efficient and less costly currency landscape will impact volatility. On the one hand, electronic currencies will be a representation of their existing counterparts and will be pegged accordingly – so there will be no difference between the value of the euro and e-euro. But there’s also an argument that when things start to move faster, volatility increases. And it’s clear that e-currencies will push instantaneous actions that will accelerate the need for companies to run more efficient FX risk management programs. 

Tools for Managing Electronic Currencies

As Pericles said, the key is not to predict the future but to be prepared for it. In order to provide the automation and agility demanded by this changing landscape, it is necessary to leverage technologies that have invested in APIs, as well as in microservices that can deliver the right data to the right people at the right time. These elements also have the potential to help companies optimize their revenues and gross margins, with a positive impact on EBITDA and earnings per share (EPS).

An established benchmark for companies in the U.S. and elsewhere is that translation risk – i.e. the risk arising when assets and liabilities on the balance sheet are denominated in foreign currency and have to be exchanged into another currency, impacting net earnings – should be less than one cent earnings per share. Technology can play an important role in helping companies achieve that level of impact that shareholders are comfortable with through data, insights, agility and automation.

Leveraging the Right Technology

Kyriba’s new FX risk management offerings have resulted in a key differentiator: the amalgamation of cash management and FX management. When treasurers think about cash flow exposure forecasting, they tend to carry out forecasting within individual currencies. But when it comes to managing risk, companies don’t manage a particular currency in a closed system – they manage that currency in terms of its relationship with another currency. 

In the future, the management of cash and currency exposures will increasingly merge. Instead of selling euros and buying dollars, and then looking at the exposure the next day, companies will immediately see their risk adjusted when they carry out an FX transaction.

To summarize, as the FX landscape evolves with the arrival of e-currencies, it’s likely that this shift will bring greater volatility and the need for more instantaneous actions. As a result, treasurers will increasingly need access to tools offering higher levels of automation, greater efficiency and better access to trusted data. 

Watch Kyriba Chief Evangelist, Wolfgang Koester’s recent segment on Fox Business to hear his predictions for the currency markets in 2020 and his thoughts on the expected release of China’s e-yuan.

Want to know more? Look out for other interviews with Wolfgang by checking our newsroom.