As more businesses grow beyond borders, the need to use a wider range of currencies rises. This is when finance teams start to get more involved in managing xenocurrencies for the business. But without insights, managing foreign currencies can be a difficult task for financial managers and accounting teams alike.
What is xenocurrency?
A xenocurrency is just another way of saying foreign currency. Xenocurrencies are currencies traded on markets outside the country where their central bank issued them. The vast majority of finance professionals use the term foreign currency these days instead, as the prefix xeno- has some negative connotations (for example, xenophobia).
But you might occasionally hear xenocurrencies described as eurocurrencies too. In this scenario, the main eurocurrencies are:
- the US dollar (USD)
- the British Pound (GBP)
- the Japanese Yen (JPY)
- and the Euro (EUR).
Despite the name, most eurocurrencies have long predated the Euro, the official currency of the Europe’s Economic and Monetary Union, a group of 19 nations in the European Union which use the currency as legal tender across the bloc.
The foreign exchange industry has an average daily volume of $4 trillion, according to Reuters.
Is xenocurrency cryptocurrency?
Technically yes, cryptocurrency is a xenocurrency. That’s because cryptocurrency does not have one controlling authority, or central bank. Regulation comes from different countries. Kaspersky describes cryptocurrency as a peer-to-peer digital payment system that doesn't rely on banks to verify transactions. Instead it uses digital ledgers—always up-to-date digital files—that record every single transaction.
Examples of xenocurrency in use
Think of the US dollar, the British Pound, the Japanese Yen, and the Euro. If you’ve ever used the US dollar to pay for goods and services in Latin America, that’s a simple example of using xenocurrency. Businesses paying overseas suppliers and contractors in USD, British Pound or Euro is another example.
The challenges of using xenocurrency
Working with xenocurrency is risky and it can create many unforeseen challenges. Here are three of the main problems.
- Changing exchange rates: Foreign currencies fluctuate a lot, which can make them difficult to both track and reconcile on your books. Spikes in demand can happen when high volumes of customers access their xenocurrency portfolios or make a trade at the same time. This can create a lot of volatility in your currency balances.
- Volatility in transaction fees: Many international payment providers, banks, and cross-border money transfer vendors charge significant fees to hold and move foreign currencies. If your business handles large volumes of xenocurrency, this could become a significant expense. Ramp does not charge foreign transaction fees, giving you the ability to simplify your use of xenocurrencies as you grow.
- Liquid asset pricing: Given the interconnectedness of today’s global economy, every SMB is likely to be exposed to currency risk. That risk can come from importing services, or from exporting products to foreign markets. Companies can face exposure to asset price risks, if liquid assets are priced in different currencies.
- Global tax implications: Changes to the global tax rules under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative continue to be rolled out every few years. Financial leaders that deal regularly with foreign currencies will need to comply with these measures and ensure that they have hedged their currency risks.
CFOs, financial managers and treasury management experts will be well aware of currency fluctuation risks. One way to manage currency risk is with spend management software or a modern treasury management system (TMS).
Manage xenocurrency risks
The right spend management and payments software will provide seamless foreign currency management, so you can limit your conversion risks and manage your realization costs. You can also create restrictions on what employees can spend on and how much vendors can charge.
Ramp is the first corporate card ever to provide control down to the merchant level, meaning you can prevent foreign currency purchases across the board or during times of heightened forex volatility.
The term xenocurrency is defined in our Ramp Finance Glossary.