The fall in the value of cryptocurrencies by over 50% since the beginning of 2022 and the sudden closure of crypto platforms due to fraud and cyber-attacks do not herald a bright future for these digital currencies. However, the crisis is an opportunity to examine fundamental issues in the market, resolve regulatory issues and instill confidence among all stakeholders. An interesting turn in events in this area occurred in Israel about a year ago as one of the country’s District Courts received two complaints from two customers of Discount Bank who filed a class action suit against them, alleging that the bank refused to deposit funds into customers’ accounts originating from the sale of Bitcoin. The court ruling stated: “This is an interpretive issue in which the legislature itself has not yet given its opinion to the matter.” Many of us would ask “Why is this an interpretive issue”?
The answer came a few months later, earlier this year, when a number of new regulations were published in Israel as part of the framework of a draft amendment to the Anti-Money Laundering and Anti-Terror Financing Risk Management Directive, which stated: “The Bank will not refuse to provide payment services by way of activity in virtual currency solely because the service is tied to virtual currencies, in so far as the service provider in virtual currencies that is a party to the transaction received a license to provide the service in Israel.”
This is certainly good news, since all that remains for the bank to find out is the source of the funds used to purchase or sell the virtual currency and the path that the funds took from the date of purchase of the currency to the deposit of funds originating from their realization in the customer’s account.
Now that the bankers were provided with the tools to “receive” such currencies , it is possible that the banks will stop defining these funds in a comprehensive manner, as “risky” or with “dubious” sources, and the contradiction that existed between the obscure regulatory requirements and the need to provide advanced financial services to customers has been resolved.
So what is still needed for us to be able to deposit cryptocurrency into a bank account? When will it be possible to purchase goods and services with them? Travel with these types of currencies abroad and maybe when the day comes, we will receive our salary in virtual currency directly into our bank account?
Like banks, businesses also manage risks and usually weigh the risk versus the chance of future income. Cash flow, working capital risks, and foreign exchange risks, among others, are just some of the interests of the finance team when considering credit, debt, and liquidity measures. As we’ve lately seen reflected in the cryptocurrency market, these coins do not behave like FIAT currencies such as the U.S. dollar or Pound Sterling. They are characterized by a great deal of uncertainty, a rapid and volatile change of the exchange rate, and lack of collateral and simple and inexpensive hedging mechanisms on exchange rates. With this background, it is easy to understand the current crypto crisis. Businesses looking to secure their future, looking for visibility into a cash flow horizon and cash stability are the key to the entry of these currencies into the mainstream of businesses. As long as there is not a cost effective means to ring-fence and protect investments, it is no wonder that corporations think twice before using these as investment vehicles.
A Deloitte article on the readiness of traders and companies, showed that many businesses would like to be paid for goods and services in cryptocurrency or use it as an investment channel. But at the same time, several explanations can be found for the delay in the adoption of crypto by these companies:
The motivation and advantages of these currencies lies mainly in the possibility of receiving the immediate return in cryptocurrency and improving the company’s liquidity in this way. The current crisis of the crypto market does not provide any CFO of any corporation with enough motivation and certainty to use these currencies in the near future.
The companies are interested in enabling the use of their organizational systems, with new blockchain technology as a mechanism for managing the supply and payment chain. This will, in time, replace the manpower-based manual handling that is currently prevalent in most companies. The transition to an automated and advanced mechanism will, of course, require large financial investment by the organization that is difficult to justify these days.
As in the past, there is no doubt that crypto first adopters will benefit from a competitive advantage and even from the expected rise in the future when the use of cryptocurrencies will become mainstream. Today, because of the current crypto crisis, it is difficult to imagine this, but the trend of the crisis may well reverse in the coming years in light of the advantages of cryptocurrencies. The question is, should we wait and see…
As noted above, the banks together with the regulators have debated on the topic of crypto currencies. They have agreed together to enable and help protect the ongoing activities of investors, corporations and individuals. It is however unlikely that we will see an advertising campaign by Israeli banks to open cryptocurrency accounts in the near future, and it is doubtful whether we will soon go to the post office to purchase Bitcoin a few hours before traveling abroad. The announcement in May of this year by the United States Administration aimed at allowing for government bodies and the industry to find solutions that will leverage advanced technology to enable better commercial activity was certainly a global milestone when it comes to recognizing and promoting the use of cryptocurrencies by the mainstream of businesses and individuals. Until there is absolute confidence, the crypto market will probably remain in the hands of players who understand the risks involved and will continue to seek and find long-term opportunities.
Tal Weiser is the Managing Director Sales, Global Services International Payments at Finastra