Crypto Currency and What you need to know about Global Exchange Risk Management
With all the craze surrounding cryptocurrencies it becomes imperative to understand what they are, and how they can be utilized in today’s modern economy. What are their capabilities, and where are their weaknesses?
Although this post does not attempt to be comprehensive it does intend to provide a quick overview and some basic information regarding the new economy and industry of online currencies in the context of international business and draws mostly from two articles that the author found to be most helpful in understanding the cryptocurrency economy. Therefore, apology ahead of time for long quotes, but the articles explain it all well. So the following discuses quickly what a crypto currency is, what the benefits and uses are, and then some quick risks and red flags.
What is Cryptocurrency?
Some general characteristics of cryptocurrencies include: block chain technology for verification and record keeping, algorithmic scarcity creating value, online ease of trade, storage, and commerce, and storage on offline systems such as hard drives (online and offline storage mechanisms are known as “wallets”).
According to an article regarding the new currencies with a specific look at bitcoin,
Governments may create financial and credit troubles thereby causing major problems for their currencies, global investors are looking for something more firm than the promise of a central bank. Tyler and Cameron Winklevoss—Bitcoin entrepreneurs—touted the digital currency as a solution to the world's troubled currency markets. "It's Gold 2.0," Tyler Winklevoss said.
“Like gold or other precious metals used as specie, Bitcoins are scarce. But their scarcity is algorithmic, as opposed to natural or accidental.
New Bitcoins are added only by being "mined," in the high-tech equivalent of a land rush. Computers on the Bitcoin network race to solve increasingly complicated mathematical problems. The first to do so has its solution verified by the other nodes on the network. Once verified, the Bitcoin can be traded using Bitcoin's wallet software.
Bitcoin mining guarantees a fixed rate of inflation (relative to itself). It roots the value of Bitcoins in the work needed to solve the puzzle. And the decentralized proof-of-work consensus protocol guards against fraud and counterfeit” (Carmody, 2013).
Therefore, Bitcoin "commoditized the process of securing the network." All the work done by financial centers and payment systems to detect fraud or counterfeit for traditional currency and credit markets is done all along the network according to the peer-to-peer protocols for Bitcoin. And the costs of that work are likewise distributed throughout the system, paid for through Bitcoin mining. This is what lets Bitcoins be traded and exchanged without huge fees (Carmody, 2013).
Cryptocurrencies therefore, are an innovative way to exchange goods and value, while maintaining scarcity and value for themselves all while being held, verified, and constructed in the web.
The most prevalent is Bitcoin, and most goins that are not Bitcoin are an alternate form of Bitcoin and are known as Alt-coin.
So, now that we have a general working idea or definition of cryptocurrencies, let’s now look at some usages and risks.
According to Carmody, the area with the greatest potential for Bitcoin worldwide is probably international remittances: money sent home by workers living abroad. Although obviously the international business community can utilize these currencies in the same manner. Currently, this money has to be handled by several intermediaries: banks, wire services, and currency exchanges all take their cut. A report by Businessweek noted that the average fee for remittances was 9 percent of the money transferred, with conversion to cash often costing an extra 5 percent. Western Union's profit margins are enormous for an intermediary, nearly 16 percent, and most of its costs are devoted to the technologies moving money from one place to another, guaranteeing the legitimacy of the transfer. In short, Western Union spends and earns billions to do what Bitcoin does for free (Carmody, 2013).
"The vast majority of people on the planet don't even own a bank account," Bitcoin evangelist Jonathan Mohan tells PBS Newshour. "And it's my contention that—and a lot of people think this—that, just as in Africa, they didn't go to phones. They went directly to cell phones, that, in the same sort of adoption curve, in these developing nations, you're not going to see them start getting bank accounts. You're going to see them just going straight to Bitcoins, because if you own a Bitcoin address, you have a bank account on your phone that you can interact on the global stage with (Carmody, 2013)"
"Money has become data," Ben Milne, founder of Dwolla, a real-time payments company, said at emTech. "There needs to be an infrastructure that allows people to exchange whatever they have for whatever they want, that confirms who they are, and confirms that the transaction is legitimate (Carmody, 2013)"
Therefore, there is great potential for utilizing crypto currencies for reaching lower level markets that may use cryptocurrencies instead of their own currencies to buy international goods. As developing markets may not have the financial infrastructure to use credit cards and other such financial instruments, cryptocurrencies may become readily available and provide a very quick and cheap alternative.
However, it must be stated that cryptocurrency has a primary use of speculation, it is estimated in a 2016 joint report from Coinbase and ARK Invest that 54% of bitcoin users utilize bitcoin strictly as an investment (Hileman & Rauchs, 2017).
Other uses include payment. “Estimates of the use of cryptocurrency for payments has varied significantly across different sources. For example, a 2016 report from the Boston Federal Reserve has estimated that 75% of US consumers who own cryptocurrencies have used them for payments within a 12 month period, while the Coinbase/ARK Invest report indicates that 46% of Coinbase users use bitcoin as a ‘transactional medium’ (defined as making at least one payment per year)” (Hileman & Rauchs, 2017). “The use of payment in cryptocurrency and merchants who will accept it is increasing worldwide as a payment method, however, cryptocurrencies are not being used as primary payment method on a daily exchange or for everyday expenses. This is mostly due to cryptocurrency not being a “closed loop” system or economy in which businesses or individuals would be compensated in the same form of payment while also utilizing cryptocurrencies as a form of making payments” (Hileman & Rauchs, 2017). (in other words, payments are usually a one-time transaction from one institution or individual to another and the economy does not necessarily blend with other currencies)
There may be some clear advantages to corporations utilizing cryptocurrencies for cross border payments, as “a considerable number of companies have emerged that
use cryptocurrency networks primarily as a ‘payment rail’ to make fast and cheap cross-border payments. However, following the recent surge in bitcoin transaction fees, some are reconsidering this strategy and shifting transactions towards private blockchain-based solutions” (Hileman & Rauchs, 2017).
So now that we have a better understanding of some of the benefits of Cryptocurrencies, now we can take a look at some downfalls.
One potential major downfall is that cryptocurrencies tend to be very volatile. This can cause major issues for the payment or transferring funds through cryptocurrencies into other more stable currencies. For example, the manager who intends to move several hundred thousand dollars in Bitcoin to Europe to be exchanged for Euros will suffer great exchange risk if Bitcoin drops within seconds of making the transfer. In this sense, most major operations using cryptocurrencies are not actually used as currencies, but instead are used more in the speculation market to attempt to grow assets and wealth. As cryptocurrencies become more stable in the future this may change, but for now it causes an extreme risk for mangers to face.
Other risks include the future of regulation and government interventions, the potential for cryptocurrencies to not being widely adopted, and cyber-attacks in the form of theft.
Nevertheless, with Cryptocurrencies being a multibillion dollar industry, they cannot be ignored, and must be explored in management as possible utilities for the expansion of global growth of Multinational firms.
Resources: Carmody, T. (2013, Oct 15). Money 3.0: How Bitcoins May Change the Global Economy. Retrieved from National Geographic: https://news.nationalgeographic.com/news/2013/10/131014-bitcoins-silk-road-virtual-currencies-internet-money/
Hileman, G., & Rauchs, M. (2017). Global Cryptocurrency Benchmarking Study. University of Cambridge, Judge Business School. Center for Alternative Finance.
A recent White House executive order remove the U.S. from the Trans-Pacific Partnership, and there is a promise from that same administration to renegotiate the North American Free Trade Agreement, One perspective is that the U.S. is on an isolationist trade policy path with an “America First” campaign. The White House has also signaled placing tariffs on other countries such as Canada and China, further confirming this move toward slowing down imports with the intent of favoring and rebuilding the U.S. industry and manufacturing sectors, all while running the risk of sparking trade wars and losing ground to China in the Pacific, Middle East, and Africa.....Read More.
There's an unfortunate stigma for business in the Middle East and North Africa as being unstable and high risk. That clouds the view of many business leaders, thus ensuring that they miss out on great opportunities in emerging markets in the region. Now is the time to reconsider investment there.
In the coming years, the Middle East and North Africa (MENA) region may become the most important developing economy for global opportunities.
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Conventional exporting strategies tend to rely mostly on global and national markets, however as globalization continues to change the international business arena and markets, larger cities have become an important actor. These “Global Cities” may be the ticket for your product or corporation’s first export initiative. As corporations have adapted and changed with globalization, so now global strategy evolves from traditional market analysis or strategies to include large hubs for international trade or potential clients. The US government creatively identifies initiatives to promote economic development through export promotion and assistance, to highlight one relevant to the topic, the Global Cities Initiative is worth taking a look at. This Exchange includes 28 US metropolitan areas engaged in a two phase planning process aimed at creating integrated export and foreign direct investment plans (Brookings, 2017). Utilizing initiatives like these where local metro government and the federal government may assist, is one way to add a competitive edge to your global strategy. GSCS will assist in identifying opportunities available to your particular firm or product.
This restructuring of the role of large metropolitan areas will give small business distinct advantages going forward. With the initiatives to bring in Foreign Direct Investment (FDI), and increase exports, small business may be able to capitalize on global as well as local partnerships for funding to establish export opportunities and increase network capabilities. Likewise, the economies of nation states will be slightly altered, granting some importance to local metropolitan areas which can narrow down the search for networking opportunities from then national to the city level. With this type of specialized market strategy, businesses can hone in on the exact contacts, markets, and opportunities that will boost their export revenue and give them competitive advantage based on specialization macroeconomic principles. This will essentially create more efficient markets in the sense that highly specialized products or services can target their specific markets at metropolitan level.
For further help or assistance with these concepts and information on how to take your corporation to the next level, contact GSCS and let us do the heavy lifting.
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Brookings. (2017). Global Cities Initiative: The Exchange. Retrieved from www.brookings.edu: https://www.brookings.edu/global-cities-initiative-the-exchange/
As social enterprise continues to develop as a more normal frame of reference for business activities, it becomes very evident that the social impact can be accomplished on a global scale with high return on investment. As corporations are sprouting up to assist farmers in the “fair” trade industry or when firms include donations, or even investments (i.e. micro-finance) to entrepreneurial activities, today’s corporation has unprecedented opportunities to make an impact on developing economies. Even when major corporations are solely focused on profits, they can have a major impact on global development. The benefits of Foreign Direct Investment for the host nation, can be substantial. When foreign corporations invest, not only do they provide capital which can contribute to a nation’s capital formation, they also provide technology transfers, knowledge and skill transfers, and employment to the local economy. Not to mention there are many green technologies that are emerging and being used to generate great profits while narrowing the global carbon footprint. These items can not only bring large sums of revenue back to the Multinational firm, but likewise can potentially provide great benefit to the host nation. Of course, if the Multinational firm is only extracting capital and not keeping substantial amounts of its investments and capital in that nation and currency, then there are potentially negative consequences. Therefore, IF the firm desires to have a social impact they will need to incorporate some sort of Corporate Social Responsibility, or at least maintain a working knowledge of the impact their frim is having.
Global Strategy Consulting Services (GSCS) is committed to social enterprise and having a positive impact on developing nations. As a result, GSCS has partnered with the International School of Djibouti (ISD) to provide resources as available for the development of this new international school. The Djiboutian economy is heavily dependent on its services industry and education and development of human capital is the key to unlock the potential growth for its economy. As Djibouti is a French colony, it has not established a primary education system in the English language which hinders its ability to grow and work in the international trade language. The lack of resources and nearly 60% unemployment rate cripples the ability to grow at any substantial rate. Therefore, if education is able to be provided in English and people are able to engage in the global market, thereby attracting foreign investment, sending their children to western universities, and conducting business in the trade language, then Djibouti’s economy may take a turn for the better.
GSCS will donate 10% of profits to the ISD to assist in the development of the school project. Likewise GSCS would like to invite you to also make a donation to assist in the development of this amazing project.
Donations can be made through the partnership of a US non-profit, Resource Exchange International (REI), that is assisting the ISD in its development. The REI website has a drop down menu under specific projects that designate the International School of Djibouti- Djibouti. If you click on the link below the ISD will be located on the left hand side of the page in the drop down menu.
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Kirk Galster, M.S. is an international business services professional. With his extensive experience and background in International Studies, Law, International Business, and Economics he is a great asset to any international management team.