The hype and hoopla around virtual currencies has heightened corporate interest; but do these fictional coins really offer value to business, or is it just irrational exuberance?
The proliferation of initial coin offerings, bitcoin futures trading, extreme volatility and a few high-profile thefts have brought cryptocurrencies into the international business conversation. Yet corporations have generally been reluctant to embrace cryptocurrencies, due to their decentralized nature and their reputation (perhaps deserved) as inhabiting a lawless “wild west” of finance.
While a multinational’s potential uses for a virtual currency are clear—accepting payments, making payments, investing, trading and raising capital—its benefits to the corporate user are harder to see. To date, only a few companies, mostly small or troubled, have issued corporate cryptocurrencies. And while thousands of companies—again, mostly small ones—accept bitcoin or other cryptocurrencies as payment, uptake has yet to threaten the options of cash, credit cards or traditional online payments in fiat currencies.
Institutional investors, certainly, are so far roundly rejecting these new financial instruments as utterly lacking transparency and rife with fraud. In December, after a debacle at Coinbase that led to widespread accusations of insider trading, Ari Paul of BlockTower Capital tweeted, “If you want fair, cryptocurrency isn’t for you”—and he’s a cryptocurrency fan. Depending on an investor’s fiduciary status, cryptocurrencies may not meet regulatory requirements such as know-your-customer (KYC) rules.
Governments are starting to tackle these problems with regulation, threats of regulation, and in some cases, outright bans. In early March, the US Securities and Exchange Commission (SEC), which has reportedly issued a number of subpoenas to entities suspected of breaking the law, put out a warning that many cryptos qualify as securities and that platforms that trade them must therefore register with the agency. That highlights an odd fact about cryptos: Although often called “coins,” which implies legal tender, many are more accurately described as “tokens”—more like coupons, or drink tickets at a club.
The track record of companies issuing virtual coins does not inspire confidence. Many are start-ups focused on virtual currencies, other issuances seem gimmicky. Perhaps most famously, in December, US microcap company Long Island Iced Tea, a nonalcoholic beverage maker, announced a change of name to Long Blockchain and a change in focus to cryptocurrency mining and blockchain development. While the stock initially soared 500% to more than $9, by mid-March it had fallen back to less than $3. The plans to mine cryptocurrencies remain in place, and the beverage maker is now a subsidiary.
For an example from a more established company, consider Kodak. In January, the troubled US photography firm saw its stock price jump 44% after it announced the launch of KodakCoin, a cryptocurrency designed to work with its new blockchain-based copyright platform for photographers, KodakOne. In fact, Kodak licensed its name to WENN Digital, the actual issuer.
Overstock, the US-based online retailer, has tied its fortunes to cryptocurrencies more than most. It was among the first companies to accept bitcoin as payment—way back in 2014. In December, the company announced it would sell $250 million in tokens for its blockchain subsidiary, tZERO, and claimed commitments for more than $100 million in less than a day. But it is not all smooth sailing even for this experienced pioneer. In late February, the SEC launched an investigation of the tZERO trading platform and its associated cryptocurrency tokens. In mid-March, the SEC Enforcement Division said it had opened dozens of such investigations, although Overstock is in talks with the SEC and was not among the companies subpoenaed.
Recent research from Germany’s RWTH Aachen University sifted through bitcoin’s blockchain to look at the “arbitrary data”—information unrelated to financial transactions that users insert into the system—and found illegal content, such as links to child pornography, and copyright and privacy violations. This confirmed speculation that had been around since 2013. Since blockchain data is stored by all the users on the blockchain, anyone on a blockchain that includes illegal material is potentially in violation. “Although court rulings do not yet exist,” the researchers conclude, “legislative texts from countries such as Germany, the UK or the US suggest that illegal content such as child pornography can make the blockchain illegal to possess for all users.”
At present, the most common corporate use of virtual currencies is simply as a means for customers to pay. Bitcoin has gained acceptance as a payment method for thousands of companies—mostly small ones, but including major brands—KFC Canada, LOT Polish Airlines, Japanese ecommerce giant Rakuten, Whole Foods, Bloomberg.com, Gap, JC Penney, Lionsgate Films and Intuit, for example, as well as organizations like the US Libertarian Party and the Louisiana Republican Party.
Accepting payments is the easiest and least risky use of virtual currencies. It can be done via any of a number of payment-services providers specializing in ecommerce, such as BitPay. “Zing, Shopify, Virgin Atlantic, Newegg, Microsoft and a lot of international sites for Amazon accept crypto this way,” explains Alon Goren, founder of Crypto Invest Summit and principal at Wavemaker Genesis, an early-stage investor in blockchain and crypto companies. “BitPay [and others] instantly transfer crypto payments into fiat, so that it just goes into the bank account like any other sale.”
What’s more, there’s some emerging regulatory support. The EU’s fifth Anti-Money Laundering Directive, due for implementation in 2019, includes virtual currencies. It states that merchants can accept them as means of payment, should they wish, without having to comply with AML regulations—the payment-service providers hold that responsibility. The exchanges that help people trade virtual currencies, such as Coinbase and Kraken (both headquartered in San Francisco), are obliged to follow KYC regulations.
“As we move into more regulation being applied, starting softly with anti-money laundering, it’s already helping bring clarity to the market,” states Hans Henrik Hoffmeyer, senior vice president for Mobile Services with Smart Payments, a Nordic-based Nets Group payment service provider. “Obligation by financial-services authorities to keep a register of these types of entities will help corporations and merchants feel more comfortable. It’s still wild west, but at least it’s not terrifying.”
The Real Payoff
While corporations can accept cryptocurrencies as a means of payment or value exchange, Hoffmeyer believes they have limited application for corporates, unlike blockchain technology. The latter solves trust-related issues, such as KYC and document verification, so it has a much wider appeal.
The financial-services sector is poised to take the greatest advantage of blockchain technology. “Nine out of 10 banks are now developing some form of blockchain solutions,” states FiREapps CEO and co-founder, Wolfgang Koester. “Clearly, financial institutions recognize they have the most to gain from technology that supports efficient transactions, contracts, payments and settlements.”
But nonfinancial companies have plenty to gain from distributed ledgers, too, especially when used to facilitate financial transactions. “International payments, for instance, are particularly challenging for corporate treasury teams: expensive, time-consuming and burdensome,” Koester says. “Blockchain technology can change all that. It can streamline the international payment process by eliminating needless touchpoints and speeding settlements at a fraction of their current costs.”
Gem, a Californian provider of blockchain solutions for enterprise, creates flexible blockchain applications that can adapt to different protocols, such as Ethereum or Hyperledger. Corporate clients include Toyota, for which it has been developing usage-based insurance products tied to telematics, enabling insurers to base rates on actual driving behavior.
Hoffmeyer suggests there are many use cases for blockchain in treasury functions and capital structures, where companies can move secure tokens instead of using real funds.IBM, now the world’s biggest employer of blockchain engineers, says more than 400 of its customers—including blue-chip names Walmart, Nestlé, Kroger, JD.com, Unilever, Maersk, DuPont and Dow Chemical—are currently running blockchain-based projects. Goren views IBM’s strategic decision to focus so heavily on blockchain as a testament to its enterprise value.
“Treasury executives will undergo a huge paradigm shift,” adds Koester. “They must adapt to a world where financial transactions happen in real time, free of the traditional fees that financial institutions used to charge. Treasury executives will need to be ready for this inevitability by having a fully automated environment in place to facilitate this new reality. DLT [distributed ledger technology] will force corporations to automate all of their manual processes in finance, treasury and accounting.”
More Than Just Money
Not all blockchain applications are, at heart, financial. For example, the World Economic Forum estimates that improving efficiencies by half in transport-related documentation and communication will increase global trade by 9.4% to 14.5%. Blockchain can help with that.
Maersk recently joined forces with IBM to form an open blockchain platform for shipping. “This new company provides a space for the industry to jointly reduce inefficiencies and build revenues based on that value add. The solution will demonstrate how a strong network can benefit all participants,” says Michael White, former president of Maersk Line in North America and CEO of the new, as yet unnamed, company. “Leveraging blockchain technology, we can infuse the transparency needed to trace goods and transactions as they flow through the supply chain. Complex networks—such as the ones that are required for global shipping—can benefit from the shared, trusted, real-time view of data.”
With a distributed ledger, the whole is greater than the sum of the parts. “Taken separately, each of the features of a blockchain already exists; but what is unique is the combination of features,” comments Marguerite Burghardt, head of the Trade Finance Competence Center for BNP Paribas. “To be quick, traceable and transparent, accessible on a need-to-know basis only, with reductions of operational risks and cost reductions—add all those features together: This is what makes blockchain technology unique.”
Distributed ledgers can even support sustainable trade. French supermarket chain Carrefour now uses DLT to create smartphone-scannable quick-response codes that consumers can use to check the origin of products. In a pilot program developed at the University of Cambridge, South African wood-fiber producer Sappi, British-Dutch consumer-goods maker Unilever, and UK supermarket chain Sainsbury’s joined with banks—Barclays, BNP Paribas and Standard Chartered—and a handful of start-ups to track and verify contracts for farmers in Malawi that supply tea to Unilever and Sainsbury’s.
As a networked technology, distributed-ledger development benefits from the input of diverse players. Burghardt says, for example, that successful pilot projects have fintechs involved for the technology, as well as banks for the financing. “But above all,” she adds, “you need to have corporates on board.” Without involving “the whole ecosystem,” she says, “you have no hope of being able to scale the initiative; so you need to involve corporates—even better if they are big corporations—as they will have the power to impose a change in the way we trade, because of their negotiating power with suppliers and clients.”
By far the biggest obstacle preventing widespread acceptance of blockchain, however, is scalability. “Corporate treasury teams are expected to process high volumes of intricate trades at a high velocity with strict settlement dates,” says FiREapps CEO Koester. “Questions remain whether today’s blockchain technology can be scaled to meet the intense demands that treasury teams face.”
The anticipated launch of Hashgraph’s new distributed-ledger technology, which promises more than 250,000 transactions per second; mathematically proven fairness (via consensus time stamping); and bank-grade security could solve those scalability issues. Wavemaker Genesis’s Goren believes this will turn more corporations onto the blockchain. “It’s going to make the argument for the rest of the world: Why would you build any other way? If everything is transparent, trackable and honest, why would I use anything else?”
COIN BOX – AN OVERVIEW OF THE BEST-ESTABLISHED CYBERCOINS
|Bitcoin||The original boasts the highest market capitalization|
|Ethereum||Smart-contract features (DApps) make it a good corporate choice|
|Ripple||The best for cross-border payments|
|Litecoin||Fast block-generation rate and faster transaction confirmation.|
|Dash||An incentive-based system that encourages users with payments to secure the network and add features to it|
|Eos||Designed to support commercial-scale decentralized applications|
|Neo||The Ethereum of China|
|Iota||Secure machine-to-machine payments in the Internet of Things economy|
|Monero||The cybercriminal’s coin of choice, owing to complete anonymity|