Despite the current bear market, cryptocurrency adoption is on the rise globally. And besides investments, more and more individuals and businesses are starting to realize digital assets' advantages compared to fiat currencies for financial transactions.
While Chainalysis' adoption index fell from the all-time high of Q2 2021,1 Q2 2022's figures still remained well above the bull market levels of Q1 2021. At the same time, the YoY growth in digital asset transaction volume surged in every region (by as much as 48% in the MENA) between July 2021 and June 2022 compared to the year prior.2
Furthermore, with nearly 300 million crypto owners (representing around 3.8% of the global population) out there, digital asset ownership and usage increased significantly in many jurisdictions between 2021 and 2022.3,4
In addition to the industry's overall development, the major shift towards remote positions and the growth in international recruitment both served as a catalyst for crypto usage's surge in 2022. Yet, we are still in a very early phase of digital asset adoption, as regulation and education are two important areas in which the market has been lacking.
Much work still needs to be done as the proper tools to manage crypto finances are not fully developed, communication with regulators is still not seamless, and the existing bridges between the fiat and cryptocurrency world are shaking with recent events like the FTX scandal.
Today, we will explore the financial side of Web3 startups, discussing topics such as:
- The advantages of crypto payments for businesses
- The most crucial challenges of Web3 CFOs and their potential solutions
- Possible development paths industry players can explore in the future
Throughout the article, we will rely on Request Finance's recent "The ultimate Web3 CFO guide".5 A big shout out to the team for creating this awesome report!
Why Should a Business Use Crypto for Finance?
Compared to fiat currencies, crypto has several significant advantages in terms of finance and payments. As you may already know, most digital assets reside on public blockchains like Bitcoin and Ethereum, which are:
- Immutable and tamper-proof: Once a record is added to the blockchain, no one can tamper with it, delete it, or modify it arbitrarily.
- Traceable and transparent: Public blockchains can be accessed by anyone with a working internet connection and a supported device. While you don't have to pass KYC and AML checks to send or receive coins, all transactions within the network are recorded transparently on the ledger, which can be freely audited by any person, organization, or other entity.
- Decentralized: Most blockchain networks cryptocurrencies are decentralized. Instead of a centralized company or institution, a massive, permissionless network of validators maintains the ecosystem, with community members being responsible for the project's governance.
- Enhanced Security: While decentralization eliminates the risk of a single point of failure, blockchain transactions are secured via public-key cryptography.
- Peer-to-Peer (P2P): Unlike fiat, crypto transactions are settled in a peer-to-peer (P2P) manner. In other words, coin transfers are executed directly between users without financial intermediaries or other third parties.
For Web3 startups and businesses outside the crypto industry, this means that they have access to a real alternative to fiat for handling their finances. Due to the nature of the blockchain, they can realize many benefits, such as:
- Significantly more cost-effective and faster transactions than with conventional methods, especially for international transfers.
- No need to rely on banks or other intermediaries to gain access to financial services.
- Global access to thousands of dApps (e.g., NFTs, GameFi, DeFi, etc.).
- eCommerce businesses can avoid chargebacks and friendly fraud (as digital asset transactions are final and can't be reversed like credit card payments).
- Adding crypto as a payment method along with conventional ones (e.g., credit cards, PayPal, bank transfers) can offer more convenience and flexibility for a business' customers, as well as help cater to a more cryptocurrency-focused audience.
- Enterprises can also turn to digital assets as an alternative to stocks, bonds, commodities, and other general market investment vehicles (and this is probably why institutional investors, businesses, and governments hold 7.75% of the total BTC supply)6.
For these reasons, many businesses have started accepting crypto in recent years. According to a survey by PYMNTS and BitPay published in June 2022, 85% of firms with over $1 billion of annual online sales and 23% of merchants between $250 million and $1 billion of online yearly sales accept some form of digital asset payments.7
At the same time, a Deloitte survey revealed that approximately 75% of retailers plan to accept cryptocurrency or stablecoin payments in the next two years.8 And this shouldn't come as a surprise, considering that large brands like Starbucks, Microsoft, Burger King, Gucci, AMC, Twitch, and AT&T already support digital asset payment methods.
The most crucial challenges of Web3 CFOs and their potential solutions
As mentioned earlier, we will leverage Request Finance's recently published report to explore the most important challenges Web3 CFOs are currently facing within the industry.
Let's get started!
Lack of education and FinOps tools
With 63% of the surveyed CFOs saying they have gaps in their knowledge related to crypto, one of the most crucial problems in this field is related to the lack of industry-specific education and experience. Despite the need to get familiar with the market, 99.6% of the respondents stated that they had no formal onboarding processes when getting started in their roles.
While most Web3 CFOs have prior experience in traditional finance or accounting, they often have to go through a steep learning curve until they have a good grasp of concepts like DeFi, NFTs, L2 blockchains, and DAOs.
Besides the above, the report revealed serious problems in the availability of FinOps tooling. While one CFO went as far as to say, "there ain't shit," 85.2% of the respondents stated that Web3 has insufficient tools for financial operations. At the same time, accounting software commonly used at Web2 firms is not a good fit for crypto businesses.
There are two potential solutions to these problems. The first – and probably most obvious – one is for Web3 startup teams to dedicate resources to educate their CFOs about the industry with a proper onboarding process.
However, doing so may become a bit expensive for startups – and this is where the second option comes into the picture.
Coupled with a bit more basic education about crypto, it could be more cost-efficient to use exclusively simple tools that CFOs with limited industry experience can handle easily. This way, they can get up to speed with Web3 faster while gradually learning more about the market and its technologies and concepts.
Working with banks and using fiat
Unfortunately, while it may seem enticing to do so, it is not the right time for Web3 companies to completely replace fiat with crypto. As the industry is still heavily relying on banks and the TradFi world for their operations, doing so would likely decrease competitiveness, create several new challenges, and may even risk the project's long-term sustainability.
For example, try to use crypto exclusively for all of the below:
- Pay your taxes
- Raise funds (in crypto) from VCs and other investors
- Settle contracts with business partners
- Cover the expenses of your team at different stores, merchants, and vendors
- Pay your employees
Of course, you could choose to work only with people and organizations that are willing to use crypto for their finances. You could even move your company to a Web3-friendly country like Switzerland, where some cantons accept tax payments in cryptocurrency.
But, again, these are all tough to achieve. And even if you manage to do so, it will likely take its toll on your business' operational success, profitability, and competitiveness.
So, instead of following the "crypto-only" path, it is best to continue supporting fiat to fulfill your business needs more efficiently. While both the Request Finance team and we believe this is the right choice at the moment, banks are notorious for creating new problems for cryptocurrency projects. These often include censorship, sudden balance freezes, application rejections, and account closures.
Like with investments, diversifying your risks is the best way to deal with banks. Instead of using a single provider, open accounts and hold your fiat across multiple uncorrelated banking providers that use different counterparties to execute transactions. To get your application accepted, it is recommended to choose a crypto-friendly bank, which can even be a non-bank financial institution (NBFI) like a fintech or a neobank (just be sure to take service coverage into account, as it is limited in the case of these providers).
This way, you can ensure that your business' fiat operations are left untouched even after one of your banks (or their partner banks) decides to freeze or close your account.
Regarding fiat, it is also important to discuss on and off-ramps, as you will have to move money between your crypto and fiat accounts. If you seek to minimize the risks of volatility, you may rely on reputable stablecoins that are pegged to the value of major national currencies like the USD, EUR, and GBP.
On the other hand, you can choose either between centralized exchanges (CEXs) or dedicated on/off ramp service providers. For the first option, Web3 CFOs have to consider a few disadvantages, including potential account closures from banking partners due to compliance risks and counterparty risks (e.g., FTX's recent scandal). Furthermore, a CEX like Binance is more suited for traders than classic startups.
In addition to NBFIs and OTC desks, Mt Pelerin and Monerium provide excellent on/off ramp services for Web3 companies.9,10
The former is an authorized financial intermediary in Switzerland, which comes in handy for our team as we are based in the same country. Besides offering a compliant way to cash out funds to Swiss bank accounts via its OTC service, Mt Pelerin's crypto-fiat widget makes it super easy for Web3 projects to integrate a gateway, which their users can leverage to buy and sell cryptocurrencies without KYC (below certain limits) and with self-custody.
At the same time, Monerium is a regulated entity in Iceland that is authorized to issue and handle electronic money. With the service, Web3 projects can leverage the provider's IBAN accounts and stablecoins (e.g., EURe and USDe) for seamless and self-custodial fiat on and off ramps without intermediaries. As a bonus, Monerium is integrated with Request Finance, which may allow you to tackle multiple challenges at once (more on this later).
Problems with crypto transactions
While CFOs know how to manage their business' fiat payments in TradFi, it gets much more complicated when it comes to crypto. Instead of your bank, you are the one that is responsible for the secure storage of your project's funds.
And as showcased via FTX's example, CEXs, CeFi services, and all other centralized providers with custodial wallets feature increased counterparty risks that can lead to huge losses if they go bankrupt, get hacked, or engage in illicit activities. For that reason, it is not a good idea to store the coins in your project's treasury at a CEX.
Instead, hold the overwhelming majority of your project's assets in self-custodial wallets to minimize risks. Remember: self-custody is your key to survival in crypto.
To ensure the safety of your business and your users, maintain multiple wallets for better diversification. Cold wallets are excellent for security, but hot wallets work much better when you have to move funds more frequently, so it is recommended to use a combination of the two.
At the same time, you shouldn't make the same mistake as the now-defunct Canadian crypto exchange QuadrigaCX, where CEO Gerald Cotten had exclusive access to the wallets all the funds were kept. After Cotten's alleged death, the company went bankrupt, causing a $190 million loss for customers.11
The best way to protect against such cases and minimize the chances of relying too much on a single individual in your organization is to utilize multi-signature or multi-party computation crypto wallets that require more than one authorized party to sign transactions.
Besides security, it is also essential to take crypto volatility into account. Unlike major fiat currencies, the prices of digital assets tend to fluctuate much more significantly. For Web3 projects, volatility can make business unpredictable, substantially increasing the risk of short-term losses.
Fortunately, businesses can protect effectively against volatility-related risks by either supporting stablecoins exclusively for payments or converting all incoming digital asset transactions into either stablecoins or fiat currencies right after receiving them.
Another crucial challenge projects face in the Web3 space is related to invoicing. For crypto-native organizations like us, it makes sense to invoice our clients in digital assets instead of fiat.
However, handling the related accounting processes on your own can lead to compliance issues with regulators. Just imagine proving the source of your business' income to tax authorities by sending them the Etherscan history of your company wallets. They simply won't accept it due to the pseudonymous nature of crypto addresses (there is also a chance that they may not understand how to use block explorers).
An excellent way to solve the above challenge is to use Request Finance's services as we do.12 It is an all-in-one finance solution for Web3 projects that helps CFOs handle all your business invoicing, payroll, and expenses in a compliant manner (and with self-custodial wallets).
Request transforms the long alphanumeric strings of transaction hashes into a human-readable format with easy documentation for financial reporting.
Most importantly, the service links wallet addresses to real-world entities in a deterministic manner, so tax authorities will know who you paid and received funds from. This also eliminates the chance that you send funds to the wrong wallets.
At the same time, Request also enables Web3 businesses to pay their contractors, employees, and business partners in an easy and compliant way. CFOs can even batch hundreds of transactions and process them at once to save time.
Future Development Paths to Consider
From understanding the industry's technologies and working with banking partners to fiat on/off ramps and secure crypto storage, CFOs face many challenges in the current, relatively nascent Web3 space. While many of them can be tackled with existing solutions, we believe there are multiple development paths to consider to optimize business operations.
First, we need a non-custodial solution that supports multiple crypto wallets that can be added and verified via KYC and AML by the same company. At the same time, it is also essential to integrate the option to cash out funds in fiat via a single IBAN.
Regarding Request Finance's solution, one of our most-sought features is integrating with custodial providers like Coinbase for enhanced convenience. It would also be nice to introduce a feature that enables us to invoice a client in one fiat currency (e.g., CHF) but allows him to settle his payment in another asset (e.g., EUR). We believe this functionality would make things more flexible for both parties. It’s already done for crypto assets but it’d be nice to implement the feature for fiat currencies.
Furthermore, while it is a rather controversial topic – especially if we consider the US sanctions against cryptocurrency mixing service Tornado Cash –, it could make sense for Web3 CFOs to occasionally leverage privacy-preserving crypto transactions (e.g., for payrolls or clients who want to maintain their privacy).13 However, this is easier said than done due to the blockchain's transparency and traceability.
For that reason, it is an interesting challenge for Web3 devs to solve in the future. It is not enough to create such a solution; organizations have to be able to find the right balance between privacy and compliance so they can ensure the safety of privacy-preserving stakeholders while staying fully compliant with regulations at the same time.