- CFOs wishing to take advantage of the opportunities presented by cryptocurrencies must divorce the value of the coins or tokens themselves from the value of their underlying technologies, Avivah Litan, VP and distinguished analyst for Gartner, said Monday during a talk at the Gartner CFO and Finance Executive Conference.
- Litan likened current happenings within the cryptocurrency industry to the early days of the dot.com boom, pointing out that significant failures during the internet’s nascent years did not stop its global spread. CFOs should therefore be careful not to view cryptocurrencies’ fluctuating valuation as an indicator of the success for future commercial applications of virtual currencies.
- “It’s normal to have this backlash, and you can’t conflate the coin price, the speculative aspect, with the value of the technology,” Litan said.
Today’s CFOs should view virtual currencies and underlying technologies as potential building blocks as Web3 begins to take shape.
“Frankly, you should not conflate the value of the coin or the tokens with the value of the technology,” Litan said. “Blockchain provides very unique characteristics. Cryptocurrency is the internet money we didn’t have in Web1. NFTs give users ownership over their assets. These are basic construction components for Web3, and they are here to stay.”
CFOs should look at the potential applications for virtual currencies within three main areas, including as stores of value as a potential hedge against inflation, as a tool for payments, and — perhaps the most risky, Litan cautioned — for investment purposes as DeFi begins to garner more interest.
Consideration of these areas for CFOs come not only as a growing number of consumers are interacting with cryptocurrencies, but as their board members and corporate partners begin to pay closer attention to such currencies and their future use. Data released by the U.S. Federal Reserve in May from a 2021 survey found 11% of U.S. adults are now owners of cryptocurrencies, with 3% of adults having used cryptocurrencies for purchases or money transfers. Notably, 13% of these transactional users lacked bank accounts.
A recent Gartner Board of Directors survey found 15% of respondents reported their organizations either currently held or were planning to hold or transact bitcoin in the next two years.
Meanwhile, institutional trading has also started to steadily dominate cryptocurrency markets. Litan pointed to 2021 data from Barron’s showing trades over $1 million from institutions represent the dominant position in the market over professional and retail investors.
Gartner projections therefore indicate 20% of large enterprises will use digital currencies either for transaction, stored value or investment by 2024, something that could keenly impact current financial networks and business models.
“There’s no doubt about it that the blockchain peer-to-peer infrastructure…is a lot more efficient and trustworthy,” Litan said. “It’s peer-to-peer, it’s immutable, and running money over these networks eliminates middlemen and it allows a much more efficient and positive experience for the user.”
Bitcoin’s infamous volatility remains one of the primary sticking points for CFOs and board members taking second looks at the technology, however, with Litan noting bitcoin crashed 32% year-to-date as of the end of May. Recent Gartner data shows 84% of CFOs still point to volatility as the top reason they are keeping away from cryptocurrencies — bitcoin in particular — while 39% of CFOs indicated board risk aversion was their larger concern when it came to holding bitcoin. Gartner’s Board of Directors survey also found 85% of boards stated their organizations will never hold or transact in bitcoin or another cryptocurrency.
Data also shows bitcoin to be highly correlated with NASDAQ, Litan said during the conference, indicating the virtual currency has not turned out to be quite the hedge upon inflation it was originally intended to be.
While staying away from cryptocurrencies such as bitcoin that live on public blockchains may therefore be the better play for CFOs currently, adopting newer technologies such as stablecoins or taking a closer look at CBDCs could offer more significant promise.
Stablecoins, which unlike bitcoin or Ethereum, are pegged to fiat currencies or more stable commodities such as gold and precious metals, could see significant use by traders and those in payments, who typically look for the steadiness of fiat when finalizing transactions. CBDC currencies, meanwhile, can only be issued by central banks.
Nine countries are currently live with CBDCs according to the Atlantic Council, while many within the cryptocurrency industry are keeping a close eye on China, whose CBDC is still in pilot. Chinese central bank officials noted in October 2021 that there were 261 million digital wallets currently active in the country, with transactions using such wallets reaching a value of over $13.7 billion USD.