Five in Five
Five key facts at a glance!
- Cryptocurrencies and blockchain technologies are already interwoven with the future of global commerce and CFOs that ignore them risk being excluded from the digitalization of international trade.
- The use of stablecoins (pegged to fiat (real-world) currencies or bonds) and smart contracts offers greater transparency, faster transactions, and the inclusion of the companies and countries that cannot otherwise access traditional financial services or global markets.
- While the benefits for CFOs are still emerging, they include always-on, fully transparent global supply chain logistics tracking and management, and faster financial transaction speeds at lower commissions.
- The European Union has been the first major market to adopt new and sweeping regulations to govern crypto assets through its MiCA (Market for Crypto Assets) law which establishes uniform rules around stablecoins and cryptocurrency platforms and exchanges across the EU.
- In Italy, the 2023 budget law imposes capital gains tax on crypto investments and income tax on crypto “activities”, and requires taxpayers to keep detailed records of all crypto-related actions.
How are Cryptocurrencies and NFTs changing global trade?
NFTs, blockchains and cryptocurrencies are set to become the new protagonists of global finance.
By eliminating the need for intermediaries by using multiple independent verification, the blockchain is changing the way assets can be transferred and now enables any asset (tangible or intangible, fungible or non-fungible) to be converted into a digital equivalent – a token.
In this digital token-based economy, business models must concern themselves with the digital versions of both real-world and digital resources.
In simple terms, a token distributed on the blockchain consists of an independently verified digital record of something, including:
- ownership of an asset,
- access to a service (utility tokens are intended to provide digital access to an application or service)
- self-executing contracts
- exchange of digital assets e.g. such as one currency for another
payments.
Global trade developments
The traceability and security offered by the blockchain has generated significant interest in the technology globally – not least for cryptocurrencies. CFOs particularly are advised to consider the benefits and advantages it offers to the finance function and global commerce.
Here are a few examples of how cryptocurrencies are changing trade:
- Money is sent and received in seconds and around the clock. Future regulatory compliance requirements could have some impact on this speed, however.
- Access to participation in international trade and commerce for the so-called “unbanked”, i.e. countries, entrepreneurs, micro enterprises or SMEs that may not have established financial relationships with banks.
- Elevated transparency and control of your trade or commercial agreements at irrisory cost thanks to blockchain-based smart contracts.
- Potential reductions in overall AML (anti-money laundering) and CTF (counter-terrorist financing) compliance costs thanks to the digital configuration of smart contracts.
- Blockchains provide alternative credit information for trade finance.
Financial implications for CFOs
Blockchain technology underpins many exciting initiatives with the potential to revolutionize our financial systems and economies.
Cryptocurrencies are also likely to remain a source of value for digital leaders and to continue to thrive despite the frequent scandals and so-called crypto winters (periods of discontent and massive devaluations for cryptocurrency markets), for the following reasons:
- the blockchain and cryptocurrencies are driving major innovation
- smart contracts will increasingly disrupt legacy institutions as trusted third parties will no longer be necessary to execute most transactions
- the blockchain and cryptocurrencies will continue to mature, becoming more secure and intuitive to use
Some of the applications that are receiving significant and deserved attention are:
- Applications in financial markets,
- Blockchain solutions to assess carbon emissions,
- Utility tokens disrupting traditional internet platforms,
- Smart contracts and digital assets as financial solutions for individuals and companies
There are two main advantages for CFOs to evaluate.
Firstly, the use of private, proprietary blockchains, created by a single owner or group of owners for their own purposes, such as to track the movement of and interactions with cargo along a supply chain.
This application is already improving supply chain efficiencies. Where detailed control of the movement of goods was previously complicated by outdated and often inaccessible paper-based processes, CFOs can have immediate and direct access to information regarding the movement of goods and related payments, thereby reducing production risks and customer loss due to inefficiencies.
Secondly, the use of stablecoins pegged to, and backed by reserves of, real-world currencies lor bonds carry less risk of the value fluctuations that affect other cryptocurrencies, and offer the benefits of faster transaction speeds, at any time of the day or month, without foreign exchange commissions and with complete and upfront visibility of the costs.
In addition, the blockchain offers total transparency of transactions. Whether it is a DEX (decentralized or peer-to-peer exchange, that allows for more pronounced anonymity, although with increasing regulation this is likely to change) or a CEX (centralized exchange, managed by a third-party custodian which allows easy exchange between different cryptocurrencies and/or fiat money but requires identity controls and record keeping on the specific exchange’s internal database) blockchain technology enables independent visibility and verification of transactions at any time.
The advent of new regulations
While some countries, traditional financial institutions and retailers have begun accepting digital currencies, large-scale adoption is still a long way off.
There are also still many technical and regulatory challenges to overcome and thinking differs on the best approach to take.
What is agreed is that policymakers should work closely with technical service providers, but also with business, financial institutions and civil society to fully understand the potential uses, benefits and risks.
Laws and regulations can then provide sufficient protection without stifling innovation.
The EU’s recently adopted Markets in Crypto-Assets (MiCA) regulation focuses on regulating specific categories of crypto-assets and exchanges, but does not apply to non-fungible tokens (NFTs) or to security tokens.
MiCA introduces a comprehensive legal framework that will harmonize regulatory requirements for crypto-asset services across Europe.
More specifically, it establishes uniform rules for:
- Issuing and trading crypto-assets;
- Authorizing and supervising crypto-asset service providers and token issuers with regard to ART (asset-referenced tokens) and e-money (electronic money tokens);
- Consumer protection around the issue, trade, exchange and custody of crypto-assets; and
- Preventing market abuse and ensuring the integrity of crypto-asset markets.
MiCA, which will apply across the European Union (EU) without the need for countries to pass additional implementation laws at national level, is expected to come into effect during the course of 2024. Its approach is in keeping with other EU consumer protection legislation and is intended to ensure effective and harmonized access to the innovative crypto-asset exchanges across the single market.
The final text, which was first agreed by the European Parliament and the European Council in June 2022 and finally officially adopted in May 2023, aims to ensure that crypto transfers can always be traced, like any other financial transaction, and that suspicious transactions are blocked.
On the other side of the Atlantic, the US is internally conflicted about who should have jurisdiction over crypto assets and related transactions.
The SEC (Securities and Exchange Commission) which governs and oversees the securities market, issues new rules and amends existing ones, has so far not announced any specific regulations, seeming to prefer trying to apply existing rules to crypto exchanges, transactions and assets. This is causing significant consternation in the US markets among big crypto players with many threatening to move their operations overseas.
In the meantime, the UK is also lagging the EU on the crypto regulation front although it has announced its ambitions to become an attractive hub for digital currencies and blockchain technology. The government closed the consultation period on a set of new rules for crypto players at the end of April 2023 and is expected to announce more details of its plans later this year.
Italy’s 2023 budget law: taxes on crypto activities
The Italian Revenue Agency’s 2023 Budget Law (Legge di Bilancio 2023) included five articles regulating the taxation of crypto activities. These include
- transactions,
- valuation,
- revaluation,
- regularization,
- and the application of a stamp duty on cryptocurrency assets.
The country will apply a capital gains tax to earnings on crypto asset investments and will treat other income from crypto assets (earned from socalled “crypto activities” which include the exchanging, trading, redeeming or selling thereof), in the same way that it currently taxes its citizens’ income from foreign currencies. The regulations apply to all crypto activities in excess of a cumulative total of €2,000.00 in the tax year, and require citizens to record and report every crypto activity in detail to enable the assessment of the applicable taxes.
In conclusion, it is clear that there has already been much development in this space – both from a regulatory perspective, and from an application and innovation perspective. Many forward-looking CFOs are already investigating cryptocurrencies and crypto assets to understand what role they can play in their companies and how best to take advantage of them. Due to the new and rapidly evolving nature of the space, however, the watchwords for CFOs, as always, are research and due diligence.
