Cryptocurrency Volatility Sparks Reflection: How CFOs Address Fiat Currency Risk

Bob Stark is the head of global market strategy at Kyriba. The views expressed in this article are solely those of the author.

Bitcoin's extreme volatility should serve as a wake-up call for CFOs and corporate risk managers—but perhaps for unexpected reasons.

Corporate CFOs generally avoid privately issued cryptocurrencies such as Bitcoin, Ethereum, and Tether due to their volatile prices. Although Fundera data shows that over 2,000 U.S. businesses, including AT&T and WeWork, accept Bitcoin payments, none of these companies hold cryptocurrencies on their balance sheets. They typically convert cryptocurrency into fiat currency daily (some even intraday) to avoid the risk of holding depreciating digital assets.

Other businesses looking to attract cryptocurrency customers use intermediary payment processors like BitPay to convert cryptocurrency into fiat currency or gift cards in real time for consumers to purchase goods and services. What these businesses have in common is that they are not in the digital currency business and do not want to expose their hard-earned revenue and cash flow to uncontrollable price fluctuations.

This logic is not unfamiliar to CFOs and treasurers. Their role is to minimize the impact of financial risks so that investors bear only operational risk, not gains or losses driven by exchange rate fluctuations of currencies (whether digital or fiat). However, hedging digital currencies is extremely difficult: the derivatives market is not yet mature, the utility of cryptocurrencies is limited, making it hard to construct natural hedges; converting to fiat currency involves friction and lacks the automation and liquidity that treasury teams are accustomed to with standard currencies.

However, despite having these liquidity and hedging tools, many CFOs are not adept at protecting their balance sheets from fiat currency exchange rate fluctuations. A quarterly study shows that in the first quarter of 2021, companies lost more than $9.5 billion due to unfavorable exchange rates; cumulative losses over the past six months exceeded $16 billion. Why is this the case?

The issue is not a lack of ability to protect cash flow and assets from price volatility. Unlike digital currencies, hedging tools for fiat currencies are well-established. The real obstacle lies in visibility. CFOs lack sufficient transparency into cash flow and balance sheets to hedge effectively—whether constructing natural hedges or entering the derivatives market. As a result, forecasted cash flow is exposed to risk, and balance sheet accounts buried deep in ERP systems remain defenseless against every exchange rate movement.

Fortunately, visibility can be improved through relatively simple solutions, enabling more data-driven risk management programs:

• Cash forecasting. Similar to the 2008 credit crisis, the pandemic has again made CFOs realize that cash and liquidity are vital to corporate survival. CEO and board demands for continuous reporting on corporate liquidity have driven optimization of daily accounts payable, customer collections, and financing decisions. However, uncertainty in cash conversion and working capital makes forecasting challenging, increasing the difficulty of presenting reliable cash forecasts. Unfortunately, many finance teams lack full automation and rely on spreadsheets to consolidate data, simulate multiple liquidity scenarios, and assess forecast accuracy. Ideally, extrapolation, modeling (including rule-driven and machine learning), and detailed variance analysis should be provided through an open platform rather than multiple systems to offer a complete view of corporate liquidity. The desired outcome is a reliable cash forecast for at least the next 13 weeks, clearly identifying problem areas and action items—including hedging opportunities needed to protect future cash flow. With the right data-driven strategy and an open liquidity platform, achievable forecasts are attainable.
• Balance sheet currency exposure. Any executive will tell you that the hidden danger lies in the unknown. This is also true for currency exposure, as risk managers can only protect the balance sheet exposures they can see. You might see an account in your ERP reported in U.S. dollars (assuming USD is the functional currency), but understanding the multiple translations of foreign currency assets and liabilities that build that balance is the key challenge. This process is complex but can be simplified through intelligent automation to identify, extract, understand, and present hidden detailed exposures. Extracting meaning from data enables finance teams to make decisions—regardless of what those decisions are. Some teams will hedge part or all of their exposure; others will optimize business processes to improve currency matching and natural hedges. A few CFOs may choose not to hedge, but they can set expectations with stakeholders with full knowledge of the exposure they are managing. Information is power, and the converse is also true—a lack of currency exposure information leaves CFOs powerless.

The fundamental reason most CFOs are reluctant to include cryptocurrencies on their balance sheets is similar: they want to eliminate the uncertainty of price volatility. Ironically, these same CFOs still have significant work to do in protecting their balance sheets from fiat currency fluctuations.