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- CFOs looking to take advantage of the opportunities offered by cryptocurrencies must separate the value of the coins or tokens themselves from the value of their underlying technologies, said Avivah Litan, VP and distinguished analyst at Gartner, during a speech to Gartner CFO and Finance. Executive Conference.
- Litan compared current events in the cryptocurrency industry to the early days of the dot.com boom, pointing out that significant failures during the Internet’s nascent years have not stopped its global spread. CFOs should therefore be careful not to view the floating valuation of cryptocurrencies as an indicator of success for future commercial applications of virtual currencies.
- “It’s normal to have this backlash and you can’t confuse the price of the coin, the speculative aspect, with the value of the technology,” Litan said.
Deepening on diving:
CFOs today should consider virtual currencies and underlying technologies as potential building blocks as Web3 begins to take shape.
“Frankly, you shouldn’t confuse the value of the coin or tokens with the value of the technology,” Litan said. “The blockchain offers truly unique features. Cryptocurrency is internet money that we didn’t have in the web1. NFTs give users ownership of their resources. These are basic building components for Web3 and are here to stay.
CFOs should look into potential applications of virtual currencies in three main areas, including stores of value as a potential hedge against inflation, as a tool for payments, and perhaps the riskiest, Litan warned, for investment purposes when the DeFi is starting to garner more interest.
Consideration of these areas for CFOs comes not only as an increasing number of consumers interact with cryptocurrencies, but as board members and business partners begin to pay more attention to those currencies and their future use. Data released by the US Federal Reserve in May from a 2021 survey found that 11% of US adults now own cryptocurrencies, with 3% of adults using cryptocurrencies for money purchases or transfers. Notably, 13% of these transactional users did not have bank accounts.
A recent survey by the Gartner Board of Directors found that 15% of respondents reported that their organizations held or were planning to hold or trade bitcoin over the next two years.
Meanwhile, institutional trading has also begun to consistently dominate the cryptocurrency markets. Litan pointed to Barron’s 2021 data showing that transactions of more than $ 1 million by institutions represent the dominant position in the market over professional and retail investors.
Gartner projections therefore indicate that 20% of large enterprises will use digital currencies for transactions, stored value or investments by 2024, which could have a major impact on current financial networks and business models.
“There is no question that the blockchain peer-to-peer infrastructure … is much more efficient and reliable,” Litan said. “It’s peer-to-peer, it’s immutable, and running money on these networks eliminates middlemen and allows for a much more efficient and positive user experience.”
Bitcoin’s infamous volatility remains a major sticking point for CFOs and board members taking a second look at the technology, however, with Litan noting that bitcoin plunged 32% year to end May. Recent Gartner data shows 84% of CFOs still point to volatility as the main reason they stay away from cryptocurrencies, especially bitcoin, while 39% of CFOs indicated that board risk aversion was their biggest concern when it came to holding bitcoin. The Gartner Board of Directors survey also found that 85% of boards said their organizations will never hold or transact in bitcoin or another cryptocurrency.
The data also shows that bitcoin is highly correlated with NASDAQ, Litan said at the conference, indicating that the virtual currency has not turned out to be quite the inflation hedge it was originally supposed to be.
While staying away from cryptocurrencies like bitcoin living on public blockchains might therefore be the best game for CFOs currently, adopting new technologies like 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 be used significantly by traders and payments traders, who typically seek the stability of the fiat money when finalizing transactions. CBDC currencies, meanwhile, can only be issued by central banks.
Nine countries are currently active with CBDCs according to the Atlantic Council, while many in the cryptocurrency industry are keeping an eye on China, whose CBDC is still in a pilot phase. Chinese central bank officials noted in October 2021 that there were 261 million digital wallets currently active in the country, with transactions using those wallets reaching a value of over $ 13.7 billion.