• FINANCE
STATING THE CASE FOR CRYPTO IN THE MINING INDUSTRY
Contributed by Mazars in South Africa
Cryptocurrencies and the underlying blockchain – the decentralised distributed database or ledger that provides the secure platform for these immutable and traceable digital transactions – are disruptive technologies that have the potential to transform industries , including the mining sector .
While the blockchain offers myriad applications , such as smart contracts and regulatory compliance , to name a few , it is the secure cryptocurrency transactions it enables that have garnered the most focus from developers and the corporate world to date .
“ Many view cryptocurrencies like bitcoin as a new form of money , while others query whether these alternative assets truly meet the definition of money from a practical perspective ,” says Wiehann Olivier , digital asset lead and audit partner at Mazars in South Africa .
Olivier explains that ‘ money ’ is defined by three pillars : It must offer a store of value , a medium of exchange , and serve as a unit of account .
“ While we have proven use cases for cryptocurrencies serving as a store of value and a medium of exchange , the latter which is increasingly happening in more developed markets , falls short in its application in the real world as a unit of account due to the volatility associated with most cryptocurrencies .”
This volatility makes it difficult for businesses to transact using cryptocurrencies as the price can fluctuate significantly on a second-to-second basis .
“ This characteristic exposes businesses to unacceptable levels of market risk . Yet , there are significant benefits to embracing cryptocurrencies ,” continues Olivier .
For instance , some multinational corporations have bought specific cryptocurrencies as an on-balance sheet investment to hedge against fiat currency depreciation and other forms of market volatility .
While adoption remains slow due to concerns around the volatility of cryptocurrencies , Olivier explains that tokenisation using stablecoins offers a suitable solution .
“ Fiat-backed stablecoins solve the volatility issue by pegging value at a 1:1 ratio with a currency such as the US dollar . This ensures a stable value that allows businesses to use it as a unit of account .”
In this regard , a financial service provider will hold fiat currency as collateral and issues tokens on the respective blockchain to the same value . This provides the primary and secondary holder with the reassurance that their token is worth USD 1 , for example .
While another form of stablecoin exists , Olivier cautions against using algorithmic stablecoins for this application due to the inherent volatility , as these cryptocurrencies are decoupled from any fiat currency or real-world asset , which creates risks .
While additional concerns relate to the unregulated cryptocurrency market , Olivier explains that various institutions that issue fiatbacked tokens are regulated financial service providers that provide all the necessary assurances and meet financial sector compliance requirements .
“ Businesses should select a trusted provider with an established reputation and proven track record in the industry to mitigate risk ,” he adds .
“ Once an institution issues these stablecoins on a blockchain , businesses can transact seamlessly and almost instantly over
“ However , a more relevant and practical application is the ability to facilitate fast and secure peer-to-peer ( P2P ) payments over the internet , including cross-border payments , and at a lower cost compared to traditional bank or intermediary-facilitated payments ,” elaborates Olivier .
Actioning cross-border payments via banks or other financial service providers is typically slow and costly , requiring interbank settlements and onerous administrative requirements for regulatory compliance .
“ Leveraging cryptocurrencies within this context can have significant benefits for a legacy business , like mining , especially for local miners that take foreign receipts and need to pay global suppliers .”
Supplied Mazars , Getty Images
56 • African Mining • January 2023 www . africanmining . co . za