Procurement with cryptocurrencies
Updated: May 4
by Levon Hovsepyan
On 12 March 2018 Procurement Network announced that it would procure cryptocurrencies for their clients, however limiting the choice to the three popular ones: Bitcoin (BTC), Litecoin (LTC) and Ether (ETH).
This announcement had been predicted by many and expected by all. Clients normally outsource procurement of complex goods, works and services to the Network, so why not to outsource procurement of crypto?
However, one needs to differentiate between procurement of cryptocurrencies from procurement with cryptocurrencies.
- Procurement of cryptocurrencies is a straightforward exchange operation, just like buying EUR in a bank and paying US dollars or any other currency for that.
- Procurement with cryptocurrencies is a classic procurement operation when currency of bids or currency of contract is a cryptocurrency. It is a process of buying services and/or products in exchange for any cryptocurrency.
Are suppliers ready for this? Is procurement with cryptocurrencies even possible? Yes and no.
Let us see when suppliers will not be interested in offering or contracting in crypto and which scenario would lead the suppliers to a definite “Yes”.
It is important to understand that cryptocurrencies’ rate fluctuation is frequent, repetitive and painful. The currency can go down for 25% within a week. It can also go up, but who can forecast that with certainty? Currencies’ common fluctuation send red flags to the suppliers. Because of these risks, it is unlikely and virtually impossible to offer a bid for a big tender in cryptocurrency. Evaluation of bids takes time and currency fluctuation can eat up all the profit envisaged for a contract even before the contract signature.
Ironically, the actual winner in dollar terms can change few times in the bid evaluation process due to currency ups and downs.
The risk of currency fluctuation will increase bid dropping cases and will inevitably decrease tender participation ratio. Imagine a complex construction contract for 24 months, where neither buyer nor contractor knows how much profit or loss they will record by the time the contract is implemented (if implemented).
As an option, both sides can agree to have a floating contract price linked to market ups and downs, but who needs that headache?
Another forecast, if bidding in crypto is allowed, the prices of bids (and consequently contracts) will be artificially increased to cover possible currency fluctuation risks. Even that might not stop bid dropping or contract termination. Needless to say, it will increase average market prices for goods and services.
So, mid and long-term procurement projects are not recommended before the crypto market is relatively stable.
What would then allow suppliers to welcome crypto? There are three scenarios where suppliers will likely to accept crypto: 1) quick or short-term contracts, 2) low value contracts and 3) contracts with 100% advance payment.
In the three scenarios above the risks are minor and suppliers are ready to take those risks. Quick contracts would allow the market to re-cash in a relatively short period of time, even if the crypto rate goes down. Low value contracts won’t cause much loss and will likely to keep the same profit margin for suppliers. Contracts with 100% advance payment would permit to record immediate revenue and keep the profit forecast firm.
What to expect
The crypto market's picture changes every day and perception of cryptocurrencies changes too. CoinMarketCap monitors more than one thousand cryptocurrencies every day. Recent reports show that governments and corporations consider backing crypto; this gives some positive signals and stability to the market. MasterCard and Visa widely announced their opinions about blockchain and plans related to some cryptocurrencies. PayPal’s Peter Thiel even called Bitcoin “Digital Gold” and many Asian banks are betting on it.
These developments will unavoidably influence procurement. However, this does not mean procurement should simply sit, wait and only reflect. Procurement industry, as it happened many times before, will embrace and harness this change. CPOs will offer alternative and smart solutions, risk mitigation measures, formulas that will keep buyer-seller relationship steady and positive.
As architects of value in any company or organization, procurement departments understand the importance of supplier management and trustworthy relationship with the market. The last thing procurement wants is profiting on supplier’s loss.
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