- Ben Poole
- Editorial Team, Treasury Management International (TMI)
Corporates have started putting Bitcoin on the balance sheet. Central banks are pursuing their own digital currencies. The rise of cryptocurrencies is happening at a startling pace and will have a variety of impacts. Now is the time for treasurers to educate themselves and their businesses about the complex changes ahead, something explored in a recent TMI and Diginex webinar.
With companies such as MicroStrategy making headlines this year by investing significant amounts of corporate cash in to Bitcoin, and TMI accepting payment in Bitcoin this April, cryptocurrencies are now firmly on the treasury agenda. It’s not just Bitcoin either, with the overall market cap of crypto currently sitting at nearly US$2tr., we are seeing significant interest in the ecosystem as a whole.
Elsewhere, central banks are keenly investigating whether they can, or indeed should, digitise their money with central bank digital currencies (CBDCs). Stablecoins, meanwhile, present a supposedly non-volatile form of cryptocurrency. The crypto space, whilst complex, is growing at an exponential rate and is becoming increasingly important for corporate treasurers to understand.
The volatility conundrum
That said, the positive noise in the market must be tempered by the reality of the cryptocurrency market. The volatility that has traditionally existed in the price of cryptocurrencies seemingly goes against the treasurer’s conservative stance of preserving capital. But with low or negative interest rates stifling the traditional short-term investment instruments that treasurers use to maximise the return on excess cash, the utility of Bitcoin as a store of value and capital appreciation can be appealing.
At the end of April, one bitcoin was equal to $53,260, having seen its value increase by more than 81% since the start of the year. This increase, driven by the cryptocurrency’s scarcity and the Federal Reserve’s continued securities purchases to pump money into the US economy, has analysts predicting a bright future for Bitcoin’s value.
“If Bitcoin were to achieve the same market valuation as gold, we’d be looking at a price of about $550,000,” says Richard Byworth, CEO of digital asset financial services and advisory company EQONEX. “This won’t happen overnight, but we’ve already seen some very credible financial institutions talk about the propensity for Bitcoin to achieve those sorts of valuations. Citibank came out with a $300,000 target in a report, Guggenheim Investments came out with a $400,000 target on Bloomberg in December when Bitcoin was trading at $20,000. My target for this year is $175,000 and I’m very confident with that.”
Richard Byworth
CEO, EQONEX
With such extreme growth predicted, it is understandable that the interest in investing in crypto assets is rising higher on the treasury agenda. Again, however, the concerns regarding market volatility are real for many treasurers. A big dip in the Bitcoin market could potentially impact the share price of a large listed company, for example. To be a responsible custodian of the balance sheet, the comparison between Bitcoin and gold is again applicable.
“If you think about your commodities portfolio, it is always a question of proportion and if you want to diversify your placement types, be prepared to tolerate a certain volatility,” notes François Masquelier, CEO, Simply Treasury. “You wouldn’t invest 50% in gold, but maybe couple of percent up to 5% maximum would be acceptable. Similarly with Bitcoin, it should be approached gradually and reasonably. You certainly don’t want to invest too much, because you also need to assess what kind of relativity you can tolerate on our balance sheet, and get the agreement from the CFO that they could also live with that.”
Progress on CBDCs
Of course, decentralised cryptocurrencies are not the only emerging digital currencies that will have an impact on treasurers. Both CBDCs and stablecoins are coming into play in the crypto space but operate in different ways and offer different uses.
A 2021 survey of central banks by the Bank for International Settlements found that 86% are actively researching the potential for CBDCs, a virtual currency that is issued by the central bank that becomes part of the monetary base of a country.
“Central banks are investigating CBDCs for couple of reasons,” says Henri Arslanian, Global Crypto Leader, PwC. “One reason is from a monetary policy perspective. It’s very difficult for a central bank to have a good understanding of economic activity that’s happening with cash. It’s a good way to evade taxes, for example, but with a CBDC economy, the government is able to know pretty much what’s happening. Secondly, it also gives governments and policymakers a fighting chance against money laundering.”
From the research and development that central banks are putting in to developing and testing their own digital currencies, two main types of CBDCs are emerging: wholesale CBDCs and retail CBDCs.
“A wholesale CBDC is between a central bank and the member banks, benefitting the member banks and affecting the central bank,” explains Arslanian. “The retail public does not see it, although it may have an impact on treasurers because it can potentially reduce costs. Potentially even more important is the retail CBDC, which is digital currency issued by the central bank that the public is able to hold.”
In the wholesale CBDC space, possibly the most advanced research can be found in the CBDC project for cross-border payments initiated by the Hong Kong Monetary Authority and the Bank of Thailand. This project has recently been joined by the Central Bank of the United Arab Emirates and the Digital Currency Institute of the People’s Bank of China, and renamed as the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project.
“For the first time, we're seeing a multi-currency wholesale CBDC initiative,” notes Arslanian. “When it comes to retail CBDC, there is no doubt which country is the most advanced by far, and that is China. While the Bank of England launched a research project on this in March 2020, the Chinese have been looking into it since 2014, and are years ahead of anybody else on this. If you want to look at this area, keep an eye on what’s happening in Asia.”
Cross-border potential for stablecoins
Meanwhile, a stablecoin is a digital coin backed one-to-one by fiat money. The benefit of the stablecoin is that, as it is tied to the US dollar or any other shared currency, you have much more certainty over the value of the asset compared with more volatile cryptocurrencies.
“Stablecoins are perfect for treasurers for a couple of reasons,” continues Arslanian. “The biggest problem that stablecoins are helping to solve is cross-border payments. Treasurers know all about the fees paid every year by sending money overseas, and also the user experience, which is absolutely terrible. With stablecoins, you are able to send money around the world 24/7, instantaneously, with virtually no fees. We’re increasingly seeing corporates send money to each other using stablecoins.”
For treasurers working in organisations that don’t want to put Bitcoin on the balance sheet for any reason, stablecoins offer an alternative digital currency experience that not only offers cost savings on cross-border payments but even benefits on the yield.
Arslanian continues: “If I have any US dollar stablecoins today as a retail customer, I’m able to get anywhere from 8% to 11% of yield on them, which is something that’s very far from what I can get on fiat dollars at the bank. This is something to keep in mind. On an efficiency and effectiveness basis, I think stablecoins should be on the agenda of every corporate treasurer.”
The regulatory impact
One potential bump in the road towards the speedy adoption of cryptocurrencies comes from the regulators. Perhaps the most high-profile example of this so far came last December when the US Securities and Exchange Commission filed an action against Ripple Labs and two of the firm’s executives. The SEC claimed Ripple’s XRP was a security rather than a currency and alleged the company had raised more than $1.3bn through an unregistered securities offering. The ongoing lawsuit highlights the potential disconnect between the crypto world and regulators in general.
“On one side you have a very fast-moving and radically innovative world of crypto,” says Dr Carsten Sørensen, Reader (Associate Professor) in Digital Innovation, PhD Programme Director, Information Systems & Innovation at The London School of Economics and Political Science Department of Management. “That is digital innovation, so it moves extremely fast. Then you have a regulatory world that’s trying to come to terms with what is happening here. US regulation has to change, otherwise this will be a problem simply because American citizens cannot engage in an ICO [initial coin offering] or even do crowd-sourcing because of the regulatory environment.”
Dr Carsten Sørensen
Reader (Associate Professor) in Digital Innovation, PhD Programme Director, Information Systems & Innovation at The London School of Economics and Political Science Department of Management
A cryptocurrency world is not tied down by national borders, so an additional challenge that could develop is one of regulatory divergences between countries in order to ensure their competitiveness.
“You can’t just tie crypto down to individual legislative restrictive areas,” notes Dr Sørensen. “We are at the early stages of the regulators trying to understand that the essence of crypto is digital, so when it comes to regulation what is a utility coin for one person is actually a share in a company for another. It really depends on what happens when you spend it. We are dealing with digital innovation so regulators need to understand what goes on under the hood. This will be a big challenge.”
Treasury challenges
Away from the major regulatory issues, there are also many challenges that cryptocurrencies pose specifically to treasurers who might want to start engaging with them.
“One priority is the security,” says Masquelier. “With payment factories within multinational companies, we have secured the outbound payments with pay policy processes, so it’s quite important to ensure the internal controls. We need to get a real grip on security around transfers of virtual currencies and reach same security level as for any other payment method.”
Accounting for cryptocurrencies could also be a treasury issue. Treasurers may have to have a discussion with auditors regarding the purpose of an investment in crypto.
“With this sort of investment, trading in the P&L [profit and loss] impact could affect your result,” continues Masquelier. “This is difficult for treasurers to explain because they are not remunerated or incentivised by superfluous excess cash returns. Therefore, treasurers might not want to take this kind of risk. Another issue is the fact that, for treasurers, a currency should usually have a level of interest, even a negative interest. If you don’t have interest it’s not like an asset, such as gold, and so you just either gain in capita or lose in capita.”
Francois Masquelier
CEO, Simply Treasury
There is also a potential cultural issue regarding engaging with cryptocurrencies. Resistance may come from inside the business as the concept is just too new for many people. One way to counter that is through education.
“Education is an interesting point. We need to educate management, educate our teams, and also educate the CFO and lead committee about why this works as an alternative investment,” says Masquelier. “Of course, it should be a reasonable investment depending on the proportion of your sales. But if you can work through the challenges, particularly in terms of automation and integration into the payment system to make sure it is secure, crypto could be an interesting asset to use for collections or to pay suppliers and customers.”
An irresistible force?
However keen, or not, treasurers are to embrace digital currencies, the trend towards crypto becoming more common in corporate life is clear. It’s not all about cutting-edge organisations or entrepreneurs investing in them. Byworth comments:. “I would point people to the bond investors that have started to move into this space. We have Paul Tudor Jones, Bill Miller and others moving into this space. These people understand debt cycles. They understand what is happening to money and what needs to happen with money to make sure that we don’t go through a horrific debt crisis.”
To prepare for such an eventuality Byworth believes treasurers review and potentially de-risk their exposure to fiat currencies. He also believes that to maintain the value of treasury holdings, it is time to consider Bitcoin and other digital stores of value.”
