Ready to Trust: Are Crypto Assets Right for Treasury?

When in 2021 Bitcoin started hitting record highs, it coincided with some very large corporates, notably Tesla and MicroStrategy, declaring their commitment to the concept by investing huge sums. This created a major ‘fear of missing out’ moment for many investors, especially those in the corporate sphere, and prices started spiralling upwards.

While some corporates had decided they were now amenable to holding Bitcoin, the arrival of the current crypto- winter saw their impetus for more engagement rapidly disappear. Indeed, it seems that many ambitious plans were brought to a standstill by the sudden realisation that many organisations were in fact not ready to engage with ‘volatile’ crypto as an asset after all.

With the fallout of the pandemic amplified by the crisis in Ukraine resulting in an economy debilitating level of inflation globally, corporate attention has been drawn elsewhere. However, Thiagarajah observes a continual background inflow of traditional finance into crypto, with more asset managers, hedge funds, and even pension funds, onboarding. Such collaborations as Blackrock and Coinbase, and Alan Howard’s $1bn raise for a crypto focused fund, show that the TradFi world can no longer ignore crypto.

Stable mates

There are currently more than 17,000 digital coins for investors to choose from. These have a global market value of around $1.14bn (at the time of writing – mid August 2022), with arguably the most famous, Bitcoin, making 40% of that value, and the top 10 covering 80%. But the market continues to evolve at breathtaking pace, with the creation of innovative new coins almost daily. Thiagarajah argues that “proper security tokens” are yet to emerge (i.e., fractions of assets with existing value) because of the current lack of clear regulation and approved secondary trading venues, and indeed, demand. Non-fungible tokens (NFTs), with their highly subjective valuations, despite the abundant market noise, are, he says, “still finding their feet”.

However, fiat-backed stablecoin (as opposed to crypto-collateralised or algorithmic stablecoins) are the ones treasurers should watch, suggests Thiagarajah. The recent crash and loss of its $1 peg by algorithmic stablecoin TerraUSD (UST) unsettled the wider stablecoin market. But background movements by the more established fiat-backed tether (USDT) and USD Coin (USDC), are continuing to gather market share, he notes. The arrival of central bank digital currencies (CBDCs) – although there are no guarantees as to when these will become mainstream – may unseat stablecoin’s rise, but if the latter is properly collateralised (algorithmic stablecoins are not) then at least their value should be retained.

That said, critical mass still eludes even this crypto format. Perhaps because cryptocurrencies are very complex, difficult to understand, and almost impossible to price – defined by some as an investment and used by others as a free international currency. Nonetheless, Thiagarajah believes conditions are ripe for a greater influx of investment. To achieve this, he says it will require other fiat currency-pegged stablecoins to be created, such as EURC, JPYC and GBPC, and for these to begin to shine more brightly. This would enable the value of cross-currency digital exchanges to be leveraged by more prudent users such as corporate treasurers.

Cash investing

Volatility is both a blessing and a curse for many crypto assets. For speculators, this instability can prove lucrative or ruinous. For treasurers, speculation is obviously prohibited, being at odds with their number one focus of capital preservation. But in the current market, where the macroeconomic backdrop remains unsettling, there is a lot of idle corporate cash-rich, there appears to be some movement outside of the traditional financial markets, to try to pick up some yield.

Route to crypto

It’s clear that Bitcoin is and will remain a speculative asset. According to the CFA Institute, only the bravest businesses are putting anywhere near the often suggested 2-5% of their portfolio into it.Obviously, the investor caveat of ‘past performance is no guarantee of future results’ stands strong in this space. That said, although it stresses its focus on due diligence and caution on behalf of its clients, the March 2022 NTAM research paper, Cryptocurrencies: Greater Mind Share Than Market Share, shows that Bitcoin would have boosted portfolio returns and even risk-adjusted metrics.For corporate treasurers, this may still represent an unacceptable roll of the dice. Further, if quick and lower-risk liquidity is needed, Thiagarajah suggests that CeFi and DeFi fiat-backed stablecoin portfolios “are far more realistic pathways into the crypto world”.

However, he adds that whenever fiat hits crypto, as it might on a centralised money market platform, there is an “an on- and an off-ramp”. This is usually in the form of traditional bank wire transfers that set up trades. As a result, the notion that the digital nature of crypto will facilitate a real- time treasury environment is not yet deliverable.

For real-time to become a reality, it will require far greater uptake of fiat-backed stablecoins, across multiple currencies. This must be followed by an ecosystem for instant cross-currency stablecoin trading. While the much-vaunted multi-CBDC (mCBDCs) concept could create that environment, this is even further away from being delivered, notes Thiagarajah (at least another three to five years for Western economies). “So for now, it’s up to private industry to do the heavy lifting.” And, to an extent, it is doing that.

Treasury reality

The cross-currency stablecoin trading infrastructure is “almost there” notes Thiagarajah, explaining that players such as BCB are already involved. However, for the “treasurer’s dream to come true”, it will require more financial participants around the world to establish crypto entities. Only this will create the nodes needed to “move money instantly, generate yield, and reduce costs”.

But the regulatory environment underpinning the crypto world needs to settle down too. That said, rapid rule changes, driven in part by governments worried about losing grip on monetary policy saw China banning coin mining, then outlawing the use of cryptocurrencies in September 2021, which actually had a positive impact on the market because it helped diffuse concentration risk in China.

On the understanding that every asset held by a corporate treasury should have a purpose, crypto may continue to struggle to find a home, given that it arguably functions best as a long-term appreciation asset. Even then, crypto has unclear long-term return potential and would not meet the needs of a conservative strategic asset allocation policy. However, for certain sophisticated corporate investors, it could form part of a tactical asset allocation policy, as a safe haven in times of market stress or high inflation, akin to gold.

The reality is that if traditional global asset managers such as NTAM ($1.2tr. AUM) are yet to engage with crypto as an investable asset, this understandable caution is a clear signal to the investor world, including the treasury community, to take heed. Indeed, Sturkenboom takes the view that the market is not yet sufficiently mature to become a meaningful part of NTAM’s treasury client portfolios.

Changing world

With the world’s economies and markets still subject to intense pressure to digitise and modernise, behavioural and policy changes are evident. Yet Sturkenboom is not convinced this is enough to create space for tokenisation and crypto to become part of treasury portfolios. “These assets still have a lot of challenges associated with them in terms of their underlying volatility and tradability, and that means a treasurer would be pulling characteristics onto their balance sheet that are quite difficult to explain to key stakeholders,” he notes. He describes this effect as “a high hurdle”.

Stablecoins are intended to be less volatile when they are pegged, and they can offer a more interesting yield, so they may yet feature on a treasurer’s book. However, while this form of crypto is seeking to position itself as the acceptable face of crypto (from a volatility perspective), the problem is that they are relatively new, and in some cases not as well-tested as might be desirable before being pulled onto a balance sheet, says Sturkenboom.

Indeed, issues are still arising. As well as the recent TerraUSD de-pegging event referred to above, in June 2022, the Optimism Collective DAO’s (decentralised autonomous organisation) native OP currency was delivered a blow when a hacker stole all 20 million OP tokens (approximately $35m) as a result of a glitch on launch. Unlike TerraUSD, OP is not a stablecoin but a ‘governance token’ (distributed to DAO members), but this loss still undermines the entire crypto space.

In practice, the main issue with crypto is still one of trust and confidence, says Sturkenboom. “How much of an exposure does a treasurer want to have towards the trust of others in a certain asset class?” he asks. Justifying this uncertainty to the board when seeking direction on policy change, even in the new economic environment, may be “a very hard sell”, especially when capital preservation really is the primary treasury goal in today’s short-term markets.

There would be a difficult conversation with stakeholders, internal and external, if a crypto investment went wrong, continues Sturkenboom. Trying to explain to the market that it was not the business itself that had the issue, but something that was owned on the balance sheet, would sit very uneasily with most treasurers who, after all, are not employed to speculate.

Any takers?

For crypto to be a credible short-term investment target, Sturkenboom believes the business itself would have to be engaged in accepting and working the token as a payment option. The most public stance on this is Tesla, which has an on-off relationship with Bitcoin payments for its products (its latest financial statement to the US Securities and Exchange Commission (SEC) says it may start accepting them again).

“If Bitcoin acceptance becomes more prevalent, then it creates a natural hedge for holders,” he explains. “But we’re still far removed from acceptance of stable or crypto coins as a method of payment. One of the main reasons why Tesla doesn’t currently accept any digital currency (even if it does still own around 43,200 Bitcoin, worth around £1.1bn) was highlighted by a tweet in May 2021 by Elon Musk. “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” he said. “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”

ESG considerations are impacting corporate decisions at many levels, including treasury investments. Making errors of judgment can have serious negative reputational consequences. With the difficulty in pricing crypto, its general predilection for volatility, the challenge of explaining it to stakeholders, and the trust issue, many treasurers will stay on the sidelines for now, especially as other issues are dominating their working day.

But the space is in a state of almost constant flux. While this may be an additional concern for some, it perhaps also signals that participants are seeking ways of bringing crypto into mainstream acceptability. With the pace of development in mind, the various forms of crypto asset should not be dismissed out of hand by treasurers, but instead be kept under scrutiny as a potential alternative short-term investment tool.

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