Could cryptocurrencies simplify global payroll?

Cryptocurrencies have not been out of the financial news headlines over recent months, with interest if this new digital technology reaching an all-time high. The roller coaster dips and rises in the value of Bitcoin and other virtual currencies have kept the market enthralled.

Their appeal has gone far beyond the financial services industry too – consumers are now buying up Bitcoin, Ethereum and Ripple in an attempt to cash in on their seemingly endless rise. Hours of analysis on whether their valuations constitute a bubble or not has failed to dissuade even casual investors from jumping on the bandwagon, and the debate around their viability looks set to rumble on for the foreseeable future.

But is there more to cryptocurrencies than meets the eye? In other words, do they have serious implications for financial transactions and the way we do business in future? If so, what are the meaningful practical applications of this little-understood phenomenon and how could it help to simplify the management of global payroll?

The issues facing global payroll are many and varied, but the practicalities of physically conducting foreign exchange (FX) transactions pose a key challenge. Simply put, it is often not easy to organise international payments to staff. Dealing with banks and other providers on a global scale is often a chore as is complying with the various international regulatory demands around large payments.

On top of this situation, volatile currency markets mean that being in a position to undertake payroll transactions securely is far from certain. For example, a company paying staff around the world may either choose to do so in the local currency, which means it will probably have to undertake numerous FX transactions, or opt to pay staff in a single currency. In this instance, the burden will fall on employees to change their wages into the local currency.

Cryptocurrency benefits

The problem is that both approaches have the potential to become a logistical nightmare and both employees and employers alike stand to lose out to volatile currency markets. A suite of hedging options and other FX products can help protect against this scenario, and a good currency broker can make the process run more smoothly. But having in-built protection as part of a global payroll transaction would obviously simplify the process greatly.

Blockchain technology, and the cryptocurrencies that rely upon it, open up a realm of possibilities for global payroll professionals. Without delving too deeply into the technicalities of the underlying architecture, blockchain provides a vehicle that enables streamlined and simplified payments to be undertaken internationally – and quickly.

In fact, it is possible to transfer some cryptocurrencies from one online wallet to another in as little as four seconds. Unlike most FX transactions, those involving cryptocurrencies are not subject to a settlement period as blockchain enables transfers to be written on the debit and credit side at the same time. As a result, there are no waiting times.

Transferring money abroad through more traditional means, on the other hand, can take considerably longer – often days – and in that time currency values can shift dramatically. Indeed, when the amounts involved start to climb into the millions or tens of millions, even small shifts in the value of a currency can mean eye-watering losses for employers. But blockchain’s speed means that this risk is largely mitigated.

Cryptocurrencies likewise offer considerable benefits as an exchange vehicle in future as they are potentially more secure in terms of FX rates than traditional options. Although there are barriers to using them in this way today – currency exchange market fluctuations and existing cryptocurrency margins currently impair their security – the value of a stable cryptocoin could be far-reaching.

Cyptocurrency possibilities

Think of it this way: If an organisation has a million dollars to send from the US to Europe to fulfil their payroll obligations, exchanging the money into a cryptocurrency, sending it to their European branch and exchanging it into Euros is faster, more predictable and carries a lower risk profile than waiting days for an international payment to process.

But the possibilities of the technology for payroll professionals are not limited to international money transfers either. Some companies already provide employees with the option to be paid in Bitcoins, and even issue bonuses in their own “in-house” cryptocurrencies.

Although the practice is not yet widespread, it is an interesting way of incentivising staff as the value of the currency is tied to the company’s value. This means that if the organisation does well the workforce’s cryptocoins are worth more. The idea is not dissimilar to an employee share scheme but is exempt from the regulation and red tape that can accompany such initiatives.

At the moment though, possible cryptocurrency applications tend to be largely theoretical. The fact is that none of them are currently stable enough to be used for commercial purposes.

For example, Bitcoin was riding high on a wave of optimism and speculation towards the end of 2017, hitting a high of US$19,343 in valuation terms by mid-December. But by February 2018, its value had plummeted to US$8,831. In January alone, a staggering total of nearly US$50 billion was wiped off its market value.

Cryptocurrency downsides

For payroll professionals, the key benefits of cryptocurrencies lie in the ability to transfer and convert them quickly. This means that their value over a month-long period is considerably less of an issue than for it is those investors who bought Bitcoins in the hope of making a killing.

Nonetheless, the technology still remains on the fringes of the financial services industry, at least among established players such as major banks. Put simply, they are an unknown quantity, which means that investing time, energy and money into them is not currently an attractive prospect for most financial institutions.

But this will not necessarily always be the case. Their potential benefits in areas such as global payroll (and a myriad of others) are clear – and an awareness and desire to make the most of them is growing. In order to move into the institutional mainstream, however, will require one (or more) to become stable and predictable.

As a result, for the majority of payroll professionals, it should be a case of ‘wait and see’. While the technology is exciting and may well be worth exploring, the reality is that the widespread usage of cryptocurrencies to enable payroll transactions is still quite a way off.

Precisely how far off, if ever, is difficult to say. One thing is certain though, payroll professionals should keep their eyes on this space and make sure they are ready to act if and when the time is right.

 Phil McHugh 

Phil McHugh is chief market analyst at Currencies Direct After joining the company’s corporate trading desk in 2007, he gained experience of working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies. Phil now oversees all of the firm’s corporate dealing activity, manages its overall market exposure and works with a portfolio of corporate clients.