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Cryptocurrency: A New Frontier in Finance


As the world’s financial system undergoes radical transformation, cryptocurrencies have become an important part of the landscape—a hotbed for innovation, speculative bubbles and extreme market volatility. As new players enter the fray, established finance companies need to consider how to adapt.

To proponents, cryptocurrencies are a democratizing force that wrests the power of money creation away from central banks and Wall Street. They believe cryptocurrencies offer more stability than traditional currencies and can be transferred easily around the globe without needing to go through the central bank.

For others, the appeal of cryptocurrencies is more about their potential as investments. People buy them with the speculative belief that their prices will rise, similar to stocks and other securities. If they do, the profits can be used to purchase goods and services or as an alternative to traditional investments. As such, cryptocurrencies have attracted a largely investor base.

A major difference between cryptocurrencies and traditional banking is that the latter operates a centralized system with central intermediaries to enforce trust and police transactions between two parties. With cryptocurrencies, these centralized intermediaries are no longer needed because the technology behind them eliminates the need for a trusted third party. Instead, cryptocurrency transactions are recorded on a database called the blockchain, which is shared across a network of thousands of computers. New information can only be added to the blockchain if more than half of the network’s nodes agree it is valid.

In addition, cryptocurrency transactions are anonymous and encrypted, protecting user’s data from hackers and other malicious actors. This is what gives them the “crypto” part of their name: cryptography is the technology that secures a cryptocurrency’s records.

As a result, cryptocurrency’s decentralized model poses serious challenges to regulatory bodies. For example, cryptocurrencies are often traded on unregulated exchanges that lack consumer protection and other safeguards. This creates the possibility that investors could be left exposed if their cryptocurrency holdings are not properly diversified or hedged against market volatility. It also means that central bank digital currencies (CBDCs), which are expected to take a large share of the global currency market, would not be subject to the same level of oversight as traditional currencies or the monetary policies they set.

Cryptocurrencies are also creating new challenges for treasury and risk professionals. These include the need for new solutions that support embedded finance and lending, managing increased liquidity and cash buffers and addressing increased risk.

These challenges will be compounded by the impact of broader technological disruption. AI, for instance, will play an increasing role in treasury functions. As a result, building a high-performing team of technology professionals who can think creatively and be agile will be essential to the success of any firm’s finance function.

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