Treasurers by and large are expected to remain on the sidelines over the next few years when it comes to cryptocurrencies but thereafter their engagement is likely to pick up momentum as stronger regulation and knowledge of the space inspires greater confidence, according to Alisa DiCaprio, chief economist at enterprise blockchain technology firm R3.
DiCaprio sees crypto regulations getting tougher over the next five to 10 years and says that will mean treasurers will be much clearer about which digital currencies are operating at the edges of regulation, which ones are solidly regulated, and which ones are absolutely unregulated.
“That is going to be very important to treasurers as they are generally cautious and risk averse,” says Di Caprio
“Better regulation and knowledge of the crypto space will also make it a lot easier for corporates to understand which cryptocurrencies would be most useful for their business and how they need to design payment systems to cater to them,” she adds.
One of the most troublesome aspects of crypto for treasurers is their high volatility. But DiCaprio is of the view that volatility is an inherent feature of cryptocurrencies and needs to be accepted as such.
“If the volatility is too much for you do not use it. But the volatility can also be attractive, as it is already for certain hedge funds. They are exploiting the volatility and I think that is the direction of travel we will take – build new business models around the volatility, and find new ways of engaging with it. I really don’t think volatility in itself will stop interest growing,” says DiCaprio.
Though DiCaprio expects corporate engagement with cryptocurrencies to remain muted over the near to medium term, she urges treasurers to begin familiarising themselves with their development and potential applications.
“Even if the volatility is too much for them, or they feel accepting crypto payments, for example, doesn’t really make sense right now, they really need to start getting involved,” she says.
“In 10 years there is going to be a much more regulated, standardised way of using cryptocurrencies. Companies that have already built their internal capacity to deal with that development are going to be able to exploit it very quickly, have a real edge, and companies that have not are going to really struggle.”
Rich crypto universe
More near term, DiCaprio believes that over the next two to five years there will be further proliferation of digital currencies on the market. What direct involvement there has been by corporates with digital currencies so far has focused heavily on the likes of bitcoin, Ethereum and stablecoins but DiCaprio argues that there is an enormous universe of cryptocurrencies that could potentially be incorporated into corporate treasury operations.
“One thing corporates will need to work out over the next 5-10 years is what kind of digital assets are appropriate for their needs. Over time it could well be that certain regions or sectors might use a particular type of cryptocurrency more intensively. If you are exposed to those regions or sectors, it becomes really important to understand the types of digital assets that dominate across them.”
Merchants key to scaling
Considerable effort is being expended by central banks globally in developing their own fiat digital currencies. A Bank of International Settlements (BIS) survey estimates nine out of 10 central banks are exploring CBDCs and more than half are now developing them or running concrete experiments. In particular, work on retail CBDCs – the main focus for most central banks – has “moved to more advanced stages,” says the BIS study.
DiCaprio is cautiously optimistic about the long-term outlook for CBDCs but believes a major factor that will determine the success of retail CBDC solutions, and one she believes is being overlooked by developers, is the role of merchants.
“All of this [with CBDCs] is happening without really consulting merchants. Governments and central banks are consulting with commercial banks but it is unclear to me how it is all going to scale without much greater involvement and consultation with merchants. They are the key here, in my view.”
DiCaprio points to a Deloitte survey of 2000 senior executives at retail organisations across the US which found that 85% of them believe digital currencies will be ubiquitous in five years and that they have the potential to offer a considerable competitive advantage. However, the survey also says merchants believe there are still a number of factors, such as infrastructure decisions, security, and the development of a regulatory framework that will determine much of the pace at which adoption continues to grow.