Crisis in the crypto markets: Will it survive? Yes!

08-02-2023 | Carlo de Meijer | treasuryXL | LinkedIn |

The collapse of crypto exchange FTX early November 2022 plunged the crypto markets into a crisis. This event sparked a wave of crypto-bankruptcies, failed investments and rapid collapses. 

By Carlo de Meijer

The current situation is a mixture of concern and uncertainty with the future of the crypto markets. This has triggered regulators worldwide to come with stricter regulations and oversight.

The main issues I want to talk about in this blog are: How did the crypto markets react up till now? What will 2023 bring for the crypto market? And what is needed to regain trust in the crypto markets?

How did the crypto markets react up till now?

FTX’s collapse and its bankruptcy triggered fears of contagion in the crypto market. This produced a wave of bankruptcies in the crypto industry, while other crypto companies had to reduce their workforce or were confronted with liquidity problems.

Here are just a handful of crypto firms affected by the crypto downturn to name a few include names like Genesis, Binance, BlockFi, Crypto.Com, Huobi,  Coinbase, Bitvavo, Kraken, Swyftx, Blockchain.com, ConsenSys, Amber Group and Silvergate Capital. And there are many more.

Wave of bankruptcies 

Main example is Genesis, the crypto lender and trade platform owned by Digital Currency Group (DCG). Genesis which served as one of the pillars of the crypto industry came into trouble when it had lent hundreds of millions to the sister company of FTX, Alameda Research.

Genesis has filed for Chapter 11 bankruptcy protection. Under this process, a struggling company is sheltered from creditors temporarily while it attempts to restructure its finances. Since then Genesis has frozen the outflow of client assets. Genesis owes creditors more than $3 billion. s a result more than 100 thousand of creditors of the US crypto company may lose at least a part of their claim/exposure..

Another example is crypto lender BlockFi, which earlier sought financial assistance from FTX. BlockFifiled for bankruptcy protection on Nov. 28, citing ‘significant exposure’ to FTX as the main reason for its collapse. That loan, for $275 million, is one of BlockFi’s outstanding debts that needs rationalizing under Chapter 11.  

Cut down on workforce
Last year, many crypto giants were forced to cut down deeply on their workforce to cope with mounting losses.  It comes as floods of investors have piled out of centralized exchanges after the collapse of FTX.

To name some examples. Crypto.com announced that it will be laying off 20% (490 employees) of its workforce, being unable to weather the collapse FTX without further cuts. Huobi, the crypto exchange plans to reduce its global headcount by about 20%, in the latest round of layoffs to hit the beleaguered cryptocurrency industry.

Coinbase, the largest crypto platform of the US has decided to cut about a fifth of its workforce (950 employees), as it looks to preserve cash during the crypto market downturn. Coinbase, had already slashed 18% of its workforce in June. Earlier December last year.

Genesis laid off about 30% of its workforce as it faced up to the FTX fallout, which had already forced to it to stop customer withdrawals. While the mother company DGC on its turn had to sack one-tenth of its staff.

Run out of liquidity
Triggered by the FTX collapse a growing number of crypto platforms are confronted with liquidity problems. The implosion of FTX exchange has created a liquidity crisis in the crypto market that may contribute to an extended crypto winter.

Binance, the world’s largest exchange, is facing questions about the reserves it holds to backstop customer funds. As much as $6 billion in digital tokens were pulled from the exchange between Dec. 12 and Dec. 14.  Last month, Binance briefly paused withdrawals of the USDC stablecoin, prompting concerns over its own ability to cover client redemptions. It has since resumed USDC withdrawals.

Another crypto company in trouble is crypto trade platform Gemini. Gemini lent Genesis funds for its interest-bearing product, is no trying to recoup $900 million of customer money from the embattled firm.

The FXT collapse and the resulting meltdown of the cryptomarkets also has its impact on the Dutch crypto world. Bitvavo, the largest Dutch crypto trade platform (40% of the market)  that manages 1,6 billion euro and has more than 1 million clients, is becoming victim. Bitvavo that has stalled 280 million dollar at Genesis and might not get back tens of millions of client assets.

More crypto companies feel the pain

The number of companies that are getting into trouble because of the FTX collapse is firmly increasing. Due to market conditions Coinbase has made the difficult decision to halt operations in Japan and to conduct a complete review of their business in the country. Blockchain-based payment platform e-Money that aims to bridge the legacy banking system through a single blockchain layer, has ceased its issuance of the EEUR stablecoin in the context of current market conditions.

The Metropolitan Bank Holding Corp, the holding company for Metropolitan Commercial Bank, has announced that it decided to completely shut down its crypto arm. Circle Internet Financial, which runs popular stablecoin USD Coin, is ending its bid to go public. And US-based Crypto payment firm Wyre is on the brink of liquidation looming shutdown and dissolution of operations of in January 2023.

Negative investor sentiment

The FTX collapse has affected investors across the globe and deterred investor confidence in crypto currencies. It firmly has reduced the trust of investors in the cryptomarkets questioning their credibility. As a result crypto exchanges saw disappear billion dollars from client accounts. While on the other many institutional investors in FTX had their investment stuck on the platform after it filed for bankruptcy on November 11. In the worst case this could cost investors, customers and lenders many billions of dollars.

The collapse caused many retail and institutional investors to rethink their future crypto investments as well as renew their focus on how sustainable crypto is for business. The FTX implosion has deterred investors and large buyers away from the crypto ecosystem. The FTX collapse has also “shaken potential investors,” making it more difficult for crypto start-ups to bring onboard the funding they need to scale.

Deep fall of crypto currencies

As result of all these events many crypto currencies were in a downward gliding spiral triggered by the FTX collapse.

Major crypto currencies Bitcoin and Ether fell to a historical low
When FTX exchange announced bankruptcy, the Bitcoin price dropped from over $20,000 to under $16,000 in a matter of days, a fall of more than 75 percent from their highs of $69.044 on 11 November 2021. The second major crypto Ethereum also saw a similar decline, falling from above $1,600 to below $1,200 as the events unfolded (high 10 November 2021 $4444.53). Other tokens like Dogecoin, Avalanche, and Solana also plunged heavily. Striking is that the crypto currencies regained some strength during January. Bitcoin, the leading crypto currency, climbed to well above $21.000 level, a 26% gain up till now.

Total market cap lost more than $2 trillion
As a result this deep fall in crypto currencies value and due to defaults and bankruptcies the market cap for cryptocurrencies has fallen to $798 billion, or more than 75 % from a record peak of almost $3 trillion in November 2021. In all more than $2 trillion in speculative market value evaporated in 2022. In January 2023 the combined digital currency market cap surged back and is now pegged beyond  $ 1 trillion.


Where crypto markets are heading in 2023

What is the expectation for the cryptomarkets for 2023 and beyond? Remediation will take time, and very likely this could extend this crypto winter by many more months, perhaps through the end of 2023or even longer in my view. This might give the recent uptake in crypto currencies a short live.

Contagion takes a long time to fully play out. According to experts, the true contagion effects of the FTX fiasco will continue to unravel in the coming period. There is the thread that other domino stones will tumble in the overheated crypto market. FTX contagion could lead to more bankruptcies and lawsuits this year as well. 

The crypto market might see “second-order effects” from counterparties that may have lent or interacted with either FTX or Alameda. That could create a liquidity crisis in the crypto market and cause major losses and liquidations throughout the crypto industry. This especially goes for the smaller crypto players.

This longer crypto winter could lead to more liquidity issues and bankruptcies, as well as further deterioration of investor confidence. The impact that this will have is that a lot of projects actually are not going to have the funds, and therefore the resources, for them to continue and develop.

 

What is needed for a sound crypto market?

The crash of the FTX crypto exchange highlights the shortcomings of this industry, lacking financial and structural transparency as well as financial protection of consumers.

The FTX downfall has triggered renewed calls for heightened regulation and more effective oversight of the largely unregulated crypto markets to protect investors and customers. Next to more stringent regulation and supervision, creating a more sound crypto market will also ask for a much more self-cleaning capacity of the industry industry while investors should be educated to understand the various risks of crypto.

Stringent regulation and more effective oversight

 

The FTX collapse will looks certain to stir regulators into action. The industry is steadily moving towards regulation globally to protect investors from market uncertainty obliterate security risks and prevent any impact on the monetary system.

Governments in the U.S, European Union and the U.K. are increasingly taking steps to clean up the market thereby preventing similar collapses. But while the US and UK are still in a very early stage the EU is well advanced and might become a blueprint for regulators around the world.

U’s Market in Crypto Assets Regulation

The EU’s Markets in Crypto-Assets Regulation (MICA) is the most comprehensive regulatory framework to date. The bill is wide-ranging, covering money laundering, the environment, corporate reporting and consumer protection.

It aims to reduce the risks for consumers by making crypto exchanges liable if they lose investors’ assets. It would require stablecoin issuers to hold enough reserves to prevent their collapse, and would require crypto miners to disclose their energy consumption. What’s more, any exchanges that operate in the region will have to be monitored by a financial regulator from an EU member state.

MiCA may serve as a blueprint for regulators around the world. The EU crypto regulation will likely have an impact that extends well beyond the EU’s borders due to its comprehensive nature and its detailed provisions around stablecoin issuance, market manipulation, custody, transaction reporting, and more.

If the European measures are successful, there’s a strong likelihood that other jurisdictions will adopt something similar – but on the one hand, that takes time to implement. It is important that regulators act quickly. But MICA is not due to start until.

Increased scrutiny and litigation by regulators
Regulators have long litigated the ‘bad apples’ in crypto. The U.S. government will continue its litigation in 2023, and we will see additional crypto-related sanctions guidance, enforcement actions and designations in the near term.

Another step to create a more healthier and credible crypto market is by increasing regulatory scrutiny. Cyber-enabled crime presents an increasing threat to international economic stability, as well as to honest individual investors in cryptocurrency.

In the mean-time supervisors worldwide have become more alert and intervene more often. Regulators in the US already started intensifying there scrutiny activities. The SEC recently advised public-reporting crypto companies to ensure they are adequately disclosing to investors any potential material adverse exposure they may have as a result of bankruptcy events and financial distress involving crypto intermediaries. The Federal Trade Commission is investigating multiple crypto companies over allegations of deceptive conduct. They are investigating several firms for possible misconduct concerning digital assets.

The Dutch central bank has fined the US trading platform Coinbase for cryptocurrencies Coinbase. Being active in the  Netherlands without being registered, the platform should pay a fine of 3,3 million euros. Since 2020 crypto companies are obliged being registered at DNB. In this way the central bank aims to better keep an eye on if these platforms ate doing enough to prevent money laundering of financing of terrorism.

Self-cleaning ability in the crypto world

As long as there is no crypto regulation on a large scale there is immense pressure on the crypto world to bring their house on order to recover its credibility and reputation. There is growing awareness at crypto companies that only more transparency could trigger the crypto markets to grow again. We are already seeing a renewed commitment by crypto platforms to building better, more trustworthy solutions in the space and expect that trend to be a core theme of 2023. Other announced they will only partner with platforms that are over collateralized and assure the safety of their members’ assets.

Crypto exchanges also took some steps to protect their investors. A growing number of crypto companies have announced to publish an audit soon or are  working on releasing Proof of Reserves to assure their users of their fund safety. But without proper regulation it will be a great challenge to draw up annual accounts control if the bookkeeping largely consists of crypto currencies.

Those steps are just the beginning, and companies and executives within the crypto sector would be wise to get their houses in order to avoid investigations or actions that can drain resources, harm reputations and destroy businesses.

Education for investors
Crypto companies are also starting to educate their users about different aspects of trading in this ecosystem. The crypto market is still relatively new and not yet fully understood, and market conditions can change rapidly. They are asking investors to keep in mind the potential risks and make well informed decisions before making any investments. For investors it is important to conduct thorough research and consult with professionals before making any investment decisions.

Narrower cooperation
In the wake of FTX’s collapse there is an opportunity for the crypto and broader financial industry and its governing bodies globally to come together and work towards standards of conduct, including reporting on reserves and other disclosures to ensure that the industry is doing its utmost to safeguard consumers thereby building trust in the crypto markets. .

Regulators have the challenge and sometimes competing goals of keeping consumers safe while supporting the future of innovation. Striking the appropriate balance between consumer protection and innovation will require close collaboration between the industry and policymakers across jurisdictions due to the borderless nature of crypto.

 

Forward looking

There are no crystal balls in crypto and predictions are not certain.

Though the outlook for crypto is bad at this time, the broader industry is not going away. We should look at it as a transition period.

The year 2022 should act as a wakeup call for both crypto companies and investors. Following the high volatility recorded in 2022, the crypto community understand that regulations will play a crucial role forward. The crypto sector must adapt if it wants to survive. Their survival will be determined by how seriously they take risk management, governance and regulation.

It’s clear the FTX drama could radically reshape crypto in the years to come. The cryptocurrency industry will never look the same again after all of this turmoil.

Carlo de Meijer

Economist and researcher

 

Effective Finance & Treasury in Africa | Eurofinance

07-02-2023 | Eurofinance | treasuryXL | LinkedIn |

Join senior treasury peers on March 7th in London at EuroFinance’s 10th annual Effective Finance & Treasury in Africa. Understand changing developments and the unique opportunities and challenges of doing business in this dynamic region.

This year’s speaker line-up includes experienced treasurers – all active in African markets – including:

● Edward Collis, Treasurer, Save the Children
● Neiciriany Mata, Head of finance, Angola Cables
● Marta de Teresa, Group treasurer, Maxamcorp
● Chigbo Enenmo, Finance and treasury manager, Nigeria LNG
● Folake Fawibe, Integrated business service lead, Danone, Southern Africa
● Jan Beukes, Group treasurer, MultiChoice Group

They will discuss important topics including cash and FX, payments, liquidity and financing, digital transformation, share success stories and provide practical guidance on how to optimise your treasury operation for growth.

For the full agenda and to register, please visitt this link.

Quote discount code MKTG/TXL10 for an exclusive 10% discount for TreasuryXL readers.

If you have any questions, you can contact the EuroFinance team directly at [email protected].

 

Registration is open – find out more and register now.

 

 

Uncovering the benefits of a multicurrency world

03-02-2023 | treasuryXL | Kantox | LinkedIn |

We’re living in a multicurrency world and we’re multicurrency treasurers. You can get a head start on your competitors by simply understanding the benefits of operating with multiple currencies. Start leveraging the multicurrency world we’re in.

Disclaimer: This information is being shared for informational purposes only and was originally published by Kantox (Source)

With so many benefits to operating with the different foreign currencies out there, it is crazy to think that some companies are not taking advantage of this.

In this week’s episode of CurrencyCast we discussed why businesses should consider implementing a multicurrency approach to their FX risk strategy. This article will take a deeper dive into the benefits and give you some insight into how to be a more strategic treasurer.

Why we are in a multi-currency world

In this episode, we analyse a development that many find surprising, but that stands at the core of our thinking at Kantox: the multi-currency world. The prevailing view of a world dominated by a handful of currencies like the dollar and the euro is being challenged as we speak.

We’ll reveal how you can take advantage of the benefits that lie ahead in this multi-currency world and contribute to enhancing your profit margins.

How is technology pushing forward a multi-currency world

The currencies of a number of small, but well-managed economies (together with the natural rise of CNY) are gaining in importance: SEK, NOK, CAD, AUD, NZD, SGD and KRW among others.

The change is not driven in a top-down manner by macroeconomic forces. Instead, it reflects a bottom-up and microeconomic phenomenon, made possible by technology.

Today’s multi-currency world is mostly driven by corporate treasurers taking advantage of Multi Dealer Platforms such as 360T. These platforms have led to a dramatic compression of spreads, increasing liquidity beyond the major currency pairs and reducing the network effects of the USD.

For example, whereas a CAD-MXN transaction used to require two trades involving USD and CAD on the one hand, and USD and MXN on the other, now CAD-MXN can be directly and competitively traded on Multi-Dealer Platforms.

 

currency composition graph of FX reserves from IMF

 

Advantages of the multi-currency world

Back to the issue of the multi-currency world. Let me mention some of the benefits of selling in more currencies (we discussed the advantages on the contracting side earlier on):

  • FX markups. With multi-currency pricing, businesses can monetise existing FX markups.
  • High-margin sales. Companies can drive direct, high-margin sales on company websites with many different payment methods.
  • Reduced cart abandonment. Online businesses can deploy multi-currency pricing as their secret weapon to reduce cart abandonment.

Let’s take this example if you are a company operating with imports from a foreign country there could be some hesitation regarding whether to work with the local currency or not. In certain cases, using the local currency translates into better deals from a commercial perspective, as FX markups from suppliers are avoided. Also, firms get access to a wider range of suppliers.

From a liquidity management perspective, you may benefit from extended paying terms as well giving you more runway to finalise your sales. Finally, from a strictly financial perspective, there could be a wider forward discount of currency pairs which is a way to generate more positive forward points when hedging.

A strategic issue in the age of innovation

By taking FX risk out of the picture, you put your business in a position to confidently use more currencies in day-to-day operations. Additionally, if you then implement the best automation solution that will help you remove time-consuming and error-prone tasks, you could have a strong currency management strategy that becomes a great strategic asset.

On top of that, there are other bonuses to implementing technology:

  • Optimisation of interest rate differentials between currencies
  • More time to devote to value-adding tasks
  • Openness to further automation

Wrap up

Now you know all the benefits of a multicurrency world for currency managers. By empowering commercial teams to always buy and sell in the most profitable currency, the finance team acts as a strategic business enabler within the enterprise. That is the promise of the multi-currency world that is taking shape as we speak.

You are now prepared to face the future of currency management and reap all the benefits of the multiple currencies available. But to keep the ball rolling and make the most of foreign currencies, you need a tool that allows you to have full control of your FX exposure.

That’s why Kantox offers a unique currency management automation solution that enables treasurers and CFOs like you to optimise your FX workflow. Talk with our currency management experts and find out how today.

Treasury Policies & Processes for Crypto Transactions

02-02-2023 | treasuryXL | ComplexCountries | LinkedIn |

This call took place five days after FTX filed for bankruptcy. However our discussion did not dwell on crypto as an investment (We haven’t found a treasurer who would). The interest for treasurers is to help their companies understand the business opportunities of the metaverse, and that isn’t going away.

Source

According to Gartner,’ [https://www.gartner.com/en/articles/what-is-a-metaverse] by 2026, 25% of people will spend at least one hour per day in a metaverse for work, shopping, education, social media and/or entertainment’, and…’A metaverse is not device-independent, nor owned by a single vendor. It is an independent virtual economy, enabled by digital currencies and non-fungible tokens (NFTs).’

So it’s no surprise that many companies are developing strategies to capitalise on what could be a massive business opportunity. Participants in this call comprised treasurers representing companies at different stages of this journey, all facing the challenge that the regulatory and financial infrastructure available is at an early stage of evolution.

  • About half of the participants are still investigating the use of crypto and exploring how it works in case it does evolve within their businesses, but still not necessarily wanting to accept crypto or handle crypto within treasury operations.
  • Risk management to enable safe use in Corporate Treasury remains paramount and it isn’t easy.
  • We are seeing continued evolution around the NFT space and using crypto for settlement. But it continues to be quite limited.
  • Accounting requirements for how crypto currencies are handled are still not clear and not necessarily sustainable for the future. Regulations are going to evolve.
  • It is fascinating to hear, for the first time, crypto working capital is being used to match crypto receivables to payables in certain types of crypto currencies, e.g. Ether.
  • In the last 12 months companies have started to buy land in the metaverse in order to understand how it works as a marketing tool.
  • Selecting crypto currency platforms is challenging and KYC with some is a (reassuringly) painful experience. The providers discussed in this report include: Etherium, Coinbase, Mt Pelerin, Bit Panda and Anchorage.
  • For the most part, banks are watching the space and have yet to come up with solutions for corporates and CBDCs are at an early stage, but one thing we can be sure of is that there is a lot more to come on this topic.

Crypto has clearly not gone away for corporate treasurers and I’m certain we’ll see further uses going forward. There is a huge amount of detail in this report, which is essential reading for any treasurer wishing to understand the challenges or benchmark their processes.

Contributors:

To access this report

Acces to the full report is only available to subscribers to “Treasury Practice”. If you would like to request a subscription to this topic, please message [email protected].

5 Reasons to Automate your Cash Forecasting in 2023

01-02-2023 | treasuryXL | CashAnalytics | LinkedIn |

If you and your team are grinding the gears on a monster cash flow model and are considering moving to an automated solution, here are five reasons to make the switch in early 2023.

By Conor Deegan

1. Better manage the uncertain economic climate

Perhaps the biggest benefit of cash forecasting automation is that it will allow you to better predict and manage future surprises. The triple whammy of slower growth, high inflation and rising interest rates has led to considerable uncertainty that will last for the majority of 2023 and beyond. Layer in the inevitable unknowns and you have an environment where a firm handle on cash flow is critically important.

Automation will give you the cash flow data you need to manage the road ahead in a streamlined and reliable manner.

2. Manage an increased focus on cash

As a result of the changing economic environment and the expected impact on the cash flow of many businesses, you and your team will likely receive a lot more requests for cash flow reporting and insights into cash flow, including forecasts, from your senior stakeholders as they too focus more on cash flow.

Automated cash forecasting and reporting will allow you to respond faster and more efficiently to these new demands while reducing the admin burden on your team significantly.

3. Repay expensive debt faster

Banks have quickly passed on the recent interest rate increases by the US Federal Reserve and other central banks around the world to their corporate customers in the form of higher loan interest rates. As deposit rates have yet to see the same increase, there is a need for any company with revolving or short-term debt to use excess cash flow to keep debt levels at a minimum. If they don’t, they will suffer the pincer movement of higher borrowing costs and the reduced value of cash holdings which will have a major impact on the profitability of the business.

Optimising cash and debt levels, with the goal of reducing interest costs while ensuring the business has enough liquidity to function day-to-day, requires a tight handle on cash and robust visibility over current and future cash flow. Without a high level of cash forecasting and reporting automation, you won’t have access to reliable detailed cash flow visibility you need to make these debt repayment decisions with confidence.

4. Keep your team happy

The reality is no one wants to spend most of their time manually slogging away with spreadsheets daily. Cash flow spreadsheets can be some of the largest and most complex managed by any finance team due to the number of inputs and volume of data required to create meaningful cash flow forecasts.

While economic conditions have deteriorated, the labour market also remains very tight. Retention of staff remains a top priority for CFOs who understand the upfront cost and ongoing investment needed to make new hires productive and keep them happy. Investing in automation is a great way to show your team that you are committed to both innovation and helping them to do their job, the best way they can.

5. Focus on strategic priorities

In line with the above point, automation of manual cash reporting and forecasting will allow you to focus on more strategic objectives such as supporting the growth of your business and planning longer term capital requirements.

It’s impossible to properly focus on strategic issues when you’re weighed down by the grind of manual work. If you or your team spend 80% of time on manual spreadsheet-based cash flow reporting and forecasting tasks and only 20% on analysis and strategic planning, you can flip this on its head with an automated forecasting solution to instead spend most of your time on higher value tasks.

Summary of Automation Benefits

In summary, cash forecasting automation will allow you to:

  1. Produce cash flow forecasts, reporting and analytics much faster
  2. Produce more accurate forecasts that improve over time
  3. Carry out detailed drill down and analysis
  4. Reduce manual error, improving overall forecast quality
  5. Save time to focus on forward looking planning

The net result of automation is that you will produce a higher quality forecast, in a fraction of the time which will give you clearer and more reliable visibility over future cash flow.

Ready to make the change?

Here in CashAnalytics we specialise in helping companies transition from manual, time consuming spread sheet-based cash reporting and forecasting processes to a highly automated system-based approach. We are experts in cash forecasting and cash management and write extensively on the subject. The follow resources may help you as you consider next steps.

5 Treasury Trends for 2023: Managing Currencies in an Age of Uncertainty

26-01-2023 | treasuryXL | Kantox | LinkedIn |

Scared about 2023 looking even worse than the crazy last three years? Keep calm and take a holistic approach to currency management. 

Source: Kantox

If we look back at the economic landscape of last year, treasurers and CFOs have been dealing with risky scenarios for a while. But is the future as dark as some say? Our latest episode of CurrencyCast featured the treasury trends for 2023. In this article, we will take a deep dive into those trends and give you some tips on how to tackle the challenges in this volatile landscape.

Treasury trends for 2023

Consultants and pundits are busy laying out scary scenarios for 2023. However, the future is uncertain so let’s not waste time in futurology trying to predict what’s coming.

Instead, we can focus on understanding the treasury trends of 2023. In this article, we’ll analyse those trends with a focus on currency management and give you actionable tips on how to handle any hurdles ahead.

CFOs and corporate treasurers need to be well prepared for the upcoming challenges and opportunities as they manage currencies. The top five priorities in the corporate treasury space for 2023 are:

  1. FX volatility
  2. Shifting interest rate differentials
  3. Liquidity management
  4. Cash flow visibility
  5. Automation

FX volatility

In the past year, the financial markets have seen high levels of FX volatility and an unstable economy that seems to point towards a recession. Trends of high inflation, banks’ rising interest rates, political instability, and more will remain in the new year.

Hence why, it is fair to say that currency managers need to be well-prepared to face interrelated risks affecting FX rates. Companies dealing with foreign currencies will have difficulties accurately forecasting cash flows.

However, there is no reason to panic yet. There are a few strategies that corporate finance professionals can implement to tackle FX volatility; we will explain them later.

Shifting interest rate differentials

Shifting interest rate differentials are a likely scenario in 2023 as central banks act to tame inflation, each at its own pace. The good news is that companies can optimise such interest rate differentials across the entire FX workflow. Here are a couple of examples:

– With favourable forward points, pricing with the forward rate improves the firm’s competitive position without hurting budgeted profit margins.

– With unfavourable forward points, pricing with the forward rate helps managers avoid losses on carry and the temptation of excessive pricing markups.

– Finally, the cost of hedging can be lowered by delaying hedging execution with the help of automated conditional FX orders.

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Liquidity management

In addition, the current emphasis on strong liquidity management will persist well into 2023. Liquidity management allows the treasury team to have a wider view of the company’s resources and be financially agile.

This will give any treasury professional the required accurate insights on the cash projections. And ultimately, help the business be prepared for potential liquidity risks that may arise.

Cash flow visibility

Avoiding less-than-stellar cash flow visibility will be top of mind for treasurers in 2023. As economic cycles could be disrupted again, companies need to be able to get ahead of the curve and reduce deviations in their cash flow projections.

However, we believe that the importance of having accurate cash flow forecasts is somewhat overstated, at least when it comes to currency risk management.

To understand why this is so, the treasury team should consider how the different cash flow hedging programs deal with this concern:

– In firms with dynamic prices, forecasting accuracy is not much of a concern because firm sales/purchase orders have a very high occurrence probability.

– In firms with steady prices across several campaign/budget periods, layered hedging programs build the hedge rate in advance instead of protecting an FX rate.

– In firms with steady prices for a single campaign/budget period, conditional orders to protect the budget rate provide managers with time to update their forecasts.

For better cash flow visibility in the new year, companies will need to consider their ability to implement hedging programs that best suit their needs.

Automation

In 2023, the role of the corporate treasurer will require professionals to improve their technological skills. The traditional treasury function is shifting towards an automated digital infrastructure that enables increased efficiency and faster processes.

To manage currency risk in the new year, treasurers will need to move away from siloed systems and wasting time on manual tasks. Instead, they need to look for a solution that is able to automate the entire FX workflow.

Tools that are able to connect, via APIs, to their treasury management system and other data sources, for updated reports that give accurate insights into their FX exposure.

Facing the challenges

Now you know the treasury trends that will be dominating 2023 for corporate treasurers. But we also want to give you some tips on how currency managers should act in the face of such challenges.

As we like to emphasise at Kantox, currency management is much more than currency risk management. And currency risk management, in turn, is more than just the act of executing a hedge. Let us see this in more detail.

Consider the case of automated conditional orders to protect a budget rate. To the extent that the underlying levels are not hit, no trades are executed. Yet, you are still actively managing your firm’s exposure to currency risk.

Delaying hedges may lead to netting opportunities that ultimately result in less, not more, hedging transactions. The results are:

  • Less trading costs
  • Savings on the carry in the event of unfavourable forward points
  • Less cash immediately set aside for collateral requirements

The right approach for 2023

Pundits predicting a catastrophic 2023 may turn out to be right. Then again, they might not. In any case, the priority for currency managers is to take a holistic view of currency management that allows them to:

  • Embrace the entire FX workflow
  • Avoid silos and have commercial and finance teams work hand in hand
  • Take advantage of the profit margin-enhancing opportunities offered by currencies

As you have seen, corporate treasurers will need to be well-prepared for all the interrelated risks of the turbulent economic landscape. With the help of the right automation tools, the treasury function can have a strong currency management strategy that helps them storm the weather outside.

Kantox is the currency management automation solution that covers the entire FX workflow so you can improve your profit margins and leverage foreign currencies.

Book a free strategy session with our currency management specialists to learn more.

What is possible in Complex Countries for Treasury?

26-01-2023 | treasuryXL | ComplexCountries | LinkedIn |

ComplexCountries reports detail how corporate treasurers approach challenges in complex countries, across associated treasury processes and how they adapt to economic and regulatory changes.

Their reports cover a wide range of topics associated with treasury processes in these countries, and how they are impacted by economic and regulatory changes. This includes how corporate treasurers approach currency risk management, compliance with local regulations, and maintaining cash and liquidity in the face of political and economic instability. The goal is to help treasurers navigate these challenges and protect their company’s financial position.

Find below some of the free reports detailing complex country challenges for treasurers

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Six Tips to Protect Your Organization Against Payments Fraud

25-01-2023 | treasuryXL | Kyriba | LinkedIn |

By Bea Saldivar, Global Payment, ERP and Treasury Advisor
Andrew Deichler, Content Manager, Strategic Marketing

Source

 

The Threat of Impersonation

Payments fraud in 2021 was as bad, if not worse, than the year before, according to the 2022 AFP Payments Fraud and Control Survey. But even though business email compromise (BEC) scams dropped substantially last year, many organizations are still falling prey to them and incurring significant losses.

At the heart of BEC scams and more recent developments like deepfake fraud is impersonation. Cybercriminals use social engineering tactics to develop profiles on company employees or routine vendors, which they then impersonate to dupe unsuspecting people into making critical mistakes.

To identify an impersonator, it’s helpful to know the telltale signs. More than likely, the payment request will be urgent and will attempt to exploit unique circumstances, such as a specific time when employees are out of the office. Additionally, if your organization is making a lot of payments to contractors for a project, fraudsters might attempt to exploit that.

For example, Philabundance, a Philadelphia food bank lost about $1 million due to a successful BEC scam. The food bank was in the process of building a $12 million community kitchen. The accounts payment (AP) team received an invoice from what they thought was a construction company supplier and made a payment.

The Government of Carrabus County, N.C., also found itself victimized by a vendor BEC scam. The county intended to send money to a contractor it had been working with for the construction of a new high school. Through a series of emails that began in late 2018, the fraudsters made requests to update bank information. The county didn’t do its due diligence and ultimately sent more than $2.5 million to the fraudulent account. While over $776,000 was ultimately recovered, about $1.7 million remains unaccounted for.

Common Fraud Myths

When it comes to payments fraud, many treasury and finance departments still get lulled into thinking they are more protected than they are. Organizations may assume that their procedures are infallible or that any lost funds will be reimbursed, but they quickly get a wake-up call when a successful attack happens. The following myths are common.

“We have an approval process in place.” Even the companies with the strictest policies in place can still have a breakdown in processes. Employee ID/password combinations can be stolen. Regional treasury/shared service centers may require fewer numbers of approvals due to limited in-country staff. And companies with multiple ERP systems might have different approval processes—a scenario that is ripe for fraud.

“My bank will cover me.” There is no obligation for a bank to cover any client for payments fraud, unless the bank itself has been breached, like in a bank employee scheme. The bank may still reimburse corporate clients on a case-by-case basis, but don’t bet on it.

“We have cyber insurance.” Many companies assume that if they purchase cyber insurance, that they are covered in the event of a loss. However, if an organization can’t prove that it took all the right steps to protect itself, it’s very likely that the insurance policy won’t cover the loss. Many plans don’t cover BEC scams, for example, because they involve an employee making an error. There have been several legal cases where insurance firms have refused payment and the courts sided with the insurers. Furthermore, even if cyber insurance does agree to pay out, you might still have to pay a high deductible. For some plans, that cost can be tens of thousands of dollars.

What Can You Do?

Fortunately, there are many ways to protect your payments and your data. The following tips can help.

Embrace the cloud. Organizations should embrace cloud technology to secure payments and systems. IT teams know that payments data and connectivity are more secure when hosted externally. However, not all cloud solutions are alike. Solutions like Kyriba Enterprise Security ensure that treasury, payments, and risk data meet internal security policies and international security requirements while providing 24/7, global support.

Align all departments. Your internal IT department, as well as any key areas that touch payment processing areas such as treasury, accounts payable, shared services, etc. all should be aligned with your security policies. With more and more companies allowing remote work, companies must ensure that all employees are using effective protections such as strong passwords, policy controls, multifactor authentication, IP filtering, single sign-on and data encryption.

Automate payment processes and standardize controls. Automation allows organizations to standardize the payment journey from the initial request to the receipt of the payment. Risk lies in the exceptions to a standardized process, i.e., payments made outside of this typical format that provide fraudsters with opportunities. Again, these are usually one-time, urgent payment requests that can come in for things like mergers and acquisitions, legal settlements, emergency payroll, etc.

Enable real-time screening, alerts, and notifications. The rise of same-day and real-time payment systems has increased the need for real-time responses to fraud attempts. Modern fraud detection software uses artificial intelligence (AI) and machine learning to screen payments against historical payment data, pinpointing any anomalies.

Implement fraud prevention workflows. Modern payments fraud modules support fully automated, end-to-end workflows for the resolution of outstanding suspicious payments. Users can determine how each detected payment should be managed, enforcing the separation of duties between the initiator, approver, and reviewer of a detected payment.

Know your vendors. Vendors can be a major liability for your company. In some cases, vendors are granted access to their customer’s network credentials. If that vendor’s security protocols are lacking, they can become an unknowing backdoor into that customer’s systems. This is what happened in the infamous Target breach in 2013. Therefore, it is imperative to have a detailed information security questionnaire that can provide confidence in the governance and risk programs that a vendor has in place. Additionally, with vendor BEC scams proliferating, organizations need to make sure that requests for payment instruction changes are verified directly with the vendor before any transactions are completed.

Safeguarding Your Payments

To mitigate the risk and safeguard your payments, organizations must have a unified solution that connects ERPs, internal and external systems that allows for a secure, end-to-end payment journey. Furthermore, when exceptions occur, protocols can’t be abandoned no matter how urgent the request. Any departments that touch payments need to understand that one slip up can be catastrophic, not only leading to loss of funds, loss of job and reputational risk for the whole organization.

Kyriba is here to help you protect your organization against payments fraud. Learn more here.

How to get into FinTech? A Career Guide for 2023

19-01-2023 | Pieter de Kiewit | treasuryXL | LinkedIn | If you are interested in learning about FinTech and how to get into the industry, there are a few things you may want to consider. With my focus on corporate treasury, we are in close contact with various Fintech companies who ask us on a regular basis to support them in their recruitment. We learned these companies have specific requirements.

Read more

Traceability and consistency contribute to security

18-01-2023 | Cobase | treasuryXL | LinkedIn |

The importance of secure treasury functions cannot be underestimated. Fraud prevention – including sanctions checking – has long been one of the main drivers of change in corporate payments.

Source

Similarly, treasury teams that rely on a bank connectivity partner for all their bank connections need to be sure that they work in a secure and reliable way. This is especially important for bank administration, where access to various accounts might need to be changed quickly or revoked instantly.

In the final blog in this series we look at the benefits of maintaining a complete audit trail of payment activities and the advantages to be gained from having a consistent payment approval workflow across business units.

Benefits of maintaining a complete audit trail of payment activities

For the majority of companies the answer to the question ‘Do you have a complete audit trail on your payment activities’ would be no because they are (for example) relying on calculations presented in an Excel document where there are many opportunities for data to be amended or accessed without proper authorisation. Payment details are then manually re-keyed in ERP or bank systems. And to add, also counterparty details could be changed without sufficient oversight or control.

The purpose of an audit trail is to capture the end-to-end flow of a payment covering questions such as why it was originated, the person or persons who originated it, who it was approved by, and when it was executed.

In some cases this audit will be initiated by a regulator (in the case of financial institution clients), whereas for corporates the request may come from a variety of sources including:

  • The compliance or security team as a part of a wider review of IT systems.
  • As part of an investigation into a specific payment.
  • A treasurer who wants to see who in their organisation has payment approval rights.

Advantages of having a consistent payment approval workflow

Having access to an audit trail, a one-click overview of current user access rights, and approval mandates is a useful tool for any corporate looking to increase both the security and efficiency of its treasury operations and identify where steps could be removed from the process as well as to inform decisions around centralising or localising these functions.

Treasurers need to ask themselves if they have gaps in their payment approval workflows and/or local discrepancies and whether they have a central – in other words, at the push of a button – overview of payment approval rights across their organisation.

It is also important to ensure that the organisational design and policies are in place around approvals within the accounts payable and receivables teams. Approval processes that have deviated from the norm are potential signs of bank account fraud or false invoicing.

To prevent false invoicing, a limited number of users should have the ability to create new payees, settlement instructions, and cash transfers. Eliminating manual handling of payment data removes many opportunities for fraud.

Automating manual processes in invoice handling and payment processing also adds to the transparency, quality and speed of payments. Harmonised practices increase transparency and visibility, while uniform processes help to track cash outflows across the entire organisation and thus mitigate risk of both external and internal fraud.

The ultimate guide for achieving efficient and safe multibank cash visibility and payments

Treasury teams looking to optimise their cash management processes realise that making smart decisions requires tactical and strategic planning. However, there are a number of principles that can be applied by any business to increase the level of insight into how funds move into and out of their organisation.

That’s why we created ‘The ultimate guide for achieving efficient and safe multibank cash visibility and payments’. In this guide you’ll find questions that you can ask yourself to determine your current level of efficiency and spot the areas you might need to improve.