What if Suppliers Want to Pay in Crypto?
Cryptocurrency is making waves in the finance world, but is corporate procurement ready to take the risk?
Procurement with cryptocurrency means using digital stores of value to pay for goods and services instead of traditional country-backed currency and forms of credit. Buyers and suppliers must agree upon which currency or intermediary to use.
Cryptocurrencies are digital currencies generated through computation on a platform. It’s one of the most successful uses of blockchain technology to manage information securely. Cryptocurrencies like Bitcoin and Ethereum are decentralised and not linked to any government or central banks.
One risk of using crypto is you might drive your CFO mad. Amid the collapse of the FTX crypto exchange, inflation and other factors, crypto prices have been volatile, although markets have seen worse in their brief history. In mid-2022, Bitcoin’s value dropped by more than half, from just over $45,000 to around $20,000. Other coins experienced even larger value reductions. The Terra-UST ecosystem, which was pegged to the dollar, wiped out $60 billion in value when it collapsed in May.
Crypto can be used to pay vendors and to receive payments from customers and others. Your CFO and treasury department will have to weigh in on how deeply your organisation embraces digital currency.
A Hands-Off approach means using crypto to facilitate payments by converting it to and from fiat currency. Your organisation could use a third-party vendor to manage payments.
A Hands-On policy means incorporating cryptocurrency into treasury functions. Companies that take this approach may still use a third party to manage the process. There’s greater exposure to both the upside and downside of cryptocurrencies.
Volatility: Cryptocurrencies, such as Bitcoin and Ethereum, are known for their volatility, which can make them a risky option for payments. The value of a single coin can fluctuate significantly within a short period, making it difficult to predict the amount that will be paid to suppliers.
Cash Flow: Cryptocurrencies behave like cash rather than credit. The currency must be in the buyer’s digital wallet when funds are owed. There’s no float or processing time.
Traditional lines of credit do not exist in the cryptocurrency realm. Specialised financing is available from non-traditional lenders.
Security: Cryptocurrency transactions are secured through blockchain technology, which makes them highly secure and resistant to fraud. However, there are still concerns about the safety of cryptocurrency exchanges and wallets where the coins are stored. Search “digital wallet robbery” for a few million citations.
Regulation: The regulatory landscape for cryptocurrency is still evolving, and it’s uncertain how governments will ultimately treat it. This lack of clarity can create risks for companies using cryptocurrency for supplier payments.
Adoption: Not all suppliers may be willing or able to accept cryptocurrency as payment. Corporate procurement departments should assess the readiness of their suppliers to accept cryptocurrency and consider the potential impact on their relationships.
Cost: Cryptocurrency transactions can be less costly than traditional payment methods, as they don’t require intermediaries such as banks and payment processors. However, the total cost of cryptocurrency transactions can vary depending on the specific coin and the method of transfer.
While there are risks, cryptocurrencies could completely restructure global payments across the supply chain. For example, suppose your company has a supply chain that extends into largely unbanked regions of the world, including Sub-Saharan Africa and woman-owned businesses in developing countries. In that case, digital payments could bypass high exchange and transaction fees and corruption costs.
One of the top benefits of digital currencies is transaction-level transparency and authenticity through the blockchain platform.
Blockchain technology can help optimise supply chain efficiency and resilience because it enables the use of digital currency and digital technologies for optimising asset management, logistics, and strategic sourcing.
Coca-Cola, for example, experiments with the Ethereum network for decentralised finance (DeFi) to communicate with suppliers. With blockchain technology, Coca-Cola uses Ethereum digital currency and digital tokens to track physical assets for better quality control and inventory management. Blockchain payments and smart contracts eliminated the need for banks and other third-party institutions.
- Real-time and accurate revenue sharing
- Alternative to depreciation due to inflation
- Introduce new technology and prepare the organisation for central bank digital currencies
- Provide access to new capital and liquidity pools and new asset classes
- Engage vendors and new demographic groups that use the currency
A few thousand businesses in the US accept Bitcoin, not counting Bitcoin ATMs. More companies want to engage with crypto, and your important clients and vendors may be among them.
If you’re considering using crypto, Deloitte recommends starting with a pilot project. The treasury can purchase some digital currency and use it for a few non-essential payments. Track the process as the crypto is paid out, received, and valued.
Crypto adoption assessment
Consider these questions to decide if your organisation will engage in cryptocurrency payments.
- What is your goal?
- What education/training will be required to receive, monitor and manage payments?
- What partners will need to be involved?
- Will you adopt a hands-on or hands-off approach?
- What is the implantation process?
- How will you evaluate the process and performance?
Keep in mind that cryptocurrency is still essentially in start-up mode. Like any start-up industry, there will be volatility as the value of the assets develop and become widely recognised. Venturing into crypto could spur adoption of blockchain technology throughout the supply chain, transforming security and efficiency across the organisation. It’s worth monitoring the development of cryptocurrency among vendors and peer companies to gauge the demand in your ecosystem.
It could be time to test the waters of cryptocurrency for your procurement organisation.
Are you using crypto or thinking about it? Share your thoughts in the comments below!