Digital currency pros and cons

New bitcoin providers are emerging at a rapid rate, but because of previous scandals and security risks surrounding cryptocurrencies, businesses are still wary of using them.

In a recent case study for Treasury Management International, Principal Peter Frank, Director Bruno Lopes and Manager Adam Taplinger of PwC’s advisory practice explore the pros and cons of digital currencies and explain that despite “the significant unknowns surrounding digital currencies, some large corporates are beginning to open the doors for acceptance.”

The three members of the PwC advisory also discuss how the popularity of cryptocurrencies could grow or deplete and explain that it all depends “on the outcome of these early steps, digital currencies may emerge as a legitimate part of the mainstream payments landscape or recede into the background as novelty.”

Pros

In the case study, Frank, Lopes and Taplinger say that the introduction of this form of currency could be seen as an opportunity for companies to implement new technologies and therefore, succeed as a business. The benefits of digital currencies include lower transaction costs and the ability to make payments at any time. Alongside this, digital currencies may help companies to reduce and eliminate risks by using them as a transport currency and as a way of settling intercompany transactions without paying extortionate fees.

The PwC members also say that cash management will also become simpler with the increased use of currencies like Bitcoin or LEOcoin because they bypass banks and clearing houses as the payments are made directly between the payer and payee. This could also eliminate extra process steps and infrastructure costs, again making it easier for businesses to make payments.

Cons

According to Frank, Lopes and Taplinger, some risks that have raised concerns about digital currencies in the marketplace among consumers and businesses are security, payment beneficiary identification and currency volatility.

Corporates should understand that there is a limited user base for this type of currency and “the regulatory framework and tax treatments of digital currencies are still being determined, “says PwC. As well as this, infrastructure is still being developed as digital currencies are not accepted by banks and companies cannot earn interest off their balances.

Furthermore, when corporates conduct businesses in foreign countries, transactions occasionally come under threat of economic and financial statement risk and it is important for businesses to understand that they should manage action steps and exposure to risk accordingly.

Impact on traditional financial services

The ever-growing popularity of digital currencies could encourage banks to improve their digital facilities. For many years, corporates have struggled with communicating effectively with banks and digital currencies would increase pressure on banks and regulators to streamline connectivity. Banks may respond to the emerging threat of cryptocurrencies by accelerating growth in existing payment systems such as eBAM.

The PwC advisory practice states that although digital currencies may be a new but popular concept in recent years, corporate treasurers should continue to develop their current systems to better their company as a whole.  “Corporate treasurers should continue to monitor the evolution process and consider both the opportunities and the risks that digital currencies may present for their company’s payment landscape. While significant changes to existing processes and infrastructure may be required in the short-term, if implemented properly, digital currencies may represent the potential for significant gains in the long term,” PwC says.

Frank, Lopes and Taplinger finalise the paper by saying that an increase in the number of service providers and products that cater to digital currencies is expected in the future and corporates should carefully consider the potential of cryptocurrencies. They should also continue to monitor the evolution process of these currencies as they could lead to business success.