To fully appreciate what blockchain technology can bring to a corporate treasury department, start by setting aside all preconceptions about cryptocurrencies. Although the two technologies share similar trajectories, they are distinct, each with its own risks and rewards.
In the case of blockchain, or distributed-ledger technology (DLT), the potential rewards include enhanced efficiency, collaboration, transparency, and trust. In the case of corporate foreign exchange (FX) programs, blockchain provides a way to leverage those rewards to gain greater visibility into currency exposures and FX-related losses, which cost multinationals billions of dollars each year.
Finance executives initially were slow to warm to the idea of blockchain (just as they have been slow to embrace cryptocurrencies). In fact, less than a year ago, the Association for Financial Professionals (AFP) found that only 1% of survey respondents were using blockchain/distributed ledger technology. Fifty-one percent of respondents said they had no plans to do so.
By January 2018, attitudes had changed dramatically. When AFP surveyed financial executives at the start of the year, 77% of respondents said DLT was “actively being evaluated” within their organizations. In fact, 23% said their companies were already using blockchain to manage risk within the treasury and finance.
(The survey also found that among the smorgasbord of all cutting-edge technologies financial professionals now can consider — AI, robotic process automation and others — distributed ledger/blockchain “has the lowest perceived risk in terms of exposure to any new risks.”)
This transformation should not come as a complete surprise. As has been widely reported, many leading corporations are now taking blockchain seriously. JPMorgan Chase has invested more than $2 billion into building a blockchain platform. Barclays and Bank of America Merrill Lynch made similar investments. So have IBM and Microsoft as well as Toyota Financial Services. And Citigroup and Nasdaq are working together to link Citi’s business payments services directly to Nasdaq’s blockchain framework.
Why the Sudden Embrace of Blockchain?
The very fact that so many corporate heavyweights are investing in blockchain should put to rest any notion that blockchain/distributed ledger is a “bubble.” It’s not; the technology — in its current form as well as its inevitable future permutations — is here to stay. The question CFOs must now ask themselves is how they can best leverage it. To answer that question, it’s important to understand blockchain/distributed ledger and what it can do.
Blockchain technology can enhance and secure any collaborative activity, either inside a single organization or across a multitude of companies or entities. It’s an open-source, peer-to-peer database (consisting of “blocks” of data) where all stakeholders — each person or entity with an interest or stake in the transaction, project, or contract — has full, real-time access and full visibility into every interaction (or block) occurring in the chain.
The “distributed” nature of the ledger is what makes it unique. It means the ledger resides across a network of computers. No one individual “owns” a blockchain. Instead, stakeholders control only the blocks of data they affect. But collectively, all stakeholders can monitor all transactions. This facilitates full visibility and eliminates the need for intermediaries and middlemen. Every transaction is timestamped and fully transparent. This infuses the entire ecosystem with trust, efficiency, and compliance.
So, deliveries and receipts within supply chains are recorded as they happen. Financial transactions can be completed immediately, free of the many fees that traditional financial institutions charge (which explains why so many banks and global transaction facilitator SWIFT has taken such a strong interest in blockchain).
What It Means for CFOs and FX
Imagine how this real-time efficiency and transparency could improve the day-to-day functions of a corporate treasury team. Time differences that now hinder global payments would be immaterial. Reconciliation of intercompany accounts would take milliseconds rather than days. Payments would be received and recorded immediately. Cross-border currency exchanges would be instantaneous.
Consider, as well, what these enhancements would mean specifically for treasury managers tasked with staying ahead of global currency volatility. Accounting for $5 trillion in transactions each day, FX represents the world’s biggest market. It is also the most volatile. Corporate treasury managers are expected to manage their company’s massive currency exposures, hedging them against global volatility and ever-changing rate environments.
In fact, most treasury practitioners rely on predominantly manual FX programs to collect data from corporate entities around the globe. According to the “2018 AFP Risk Survey Report,” 97% of financial professionals “report that spreadsheets are currently being used at their companies to manage risk.”
Ironically, only 28% of respondents think that’s efficient. Why the disconnect? AFP concluded that since treasury and finance professionals view spreadsheets as “tried and tested,” they perceive them as less risky than new technologies.
But while they may be “tried and tested,” they’re hardly efficient. Just look at the most recent FX-related losses. In a single quarter, North American and European companies lost $5.27 billion due to ineffective currency management programs and incomplete exposure data.
Finance executives can take steps to curtail those losses, by replacing outmoded legacy programs with the efficient, secure, and transparent technologies such as DLT. The broader visibility enabled by blockchain would empower corporations to quickly see currency risk and hedge accordingly.
FX teams could also quickly leverage interest-rate differentials between one currency and another. Although it’s still in its infancy, blockchain technology offers the potential to help multinationals introduce more efficient bookkeeping.
Blockchain in its current state is far from perfect, but it will continue to evolve. The global economy is notoriously unforgiving when it comes to organizations that fail to recognize the writing on the wall.
As such, successful corporations must evolve as well. New regulations, new technology and changing consumer demand require it. And smart CFOs will be the ones that leverage the latest technologies to better manage their FX programs.
Wolfgang Koester is the CEO and co-founder of FiREapps, a provider of currency risk management services. He has more than 30 years of experience in currency markets and working with Fortune 1000 companies and government entities.