January 18, 2022
November 18, 2021
Adding Crypto Assets to Corporate Treasuries
More and more companies are starting to allocate cash to digital assets and cryptocurrencies as part of their corporate treasury strategy. Well-known organizations, such as MicroStrategy, Tesla, Square, and Ikea Group are investing in cryptocurrencies.
Crypto as an asset class is here to stay, and a new financial system based on crypto is emerging. Corporations are starting to view Bitcoin and crypto as a store of value and a way of diversifying treasury portfolios in a challenging economic climate.
In a recent study, Fidelity Digital Assets discovered that seven out of every 10 institutional investors surveyed plan to invest in digital assets in the next five years. The study also confirmed that 52% of companies surveyed in Europe, Asia, and the United States currently invest in digital assets.
There are a variety of reasons to add digital assets to a company’s balance sheet, such as:
- Seeking asymmetric risk-return observed over previous years
- Providing a natural hedge against fluctuating fiat currencies
- Adopting a corporate strategy to embrace modern, open technologies
- Complementing an operational strategy that includes accepting asset payments
Why are companies adding crypto to their treasury?
Cryptocurrencies are a hedge against possible inflation and depreciation of the dollar. Corporate treasurers tend to be conservative about their approach to cash management and invest in assets, such as bank deposits, money market funds, and government debt. Lower interest rates have kept pressure on income across multiple digital assets, with no sign of it letting up.
Annual inflation in the U.S. sits at 6.2% in October 2021 and the largest increase in 30 years, according to Labor Department data. And 10-year bonds are around 1.5%. At this point, soaring inflation and low yields on bonds have become a huge factor in how companies will make financial management decisions. Rather than allowing cash reserves to sit idle (and lose value) in the bank, smart corporate treasurers are hedging against currency devaluation and inflation by having crypto assets as part of their strategy.
The marketplace has matured to accommodate corporations. Companies will have access to highly secure, segregated custody accounts allowing finance and executive teams to seamlessly access their treasury allocation across multiple digital assets. Investing in cryptocurrencies is the tip of the iceberg for developing a use case for decentralized technologies. Modern companies are evolving into holding digital currencies on their balance sheet, and integrating with payroll, accounts receivable, and other areas where funds can be transferred. Companies that leverage these strategies have a competitive advantage, increased efficiency, and lower costs than fiat.
Corporate treasury departments are looking for investment alternatives to traditional financial markets. OTC desk Cumberland published a research paper in August 2021 that explains the implications of permissioned DeFi and how it can be an option for institutional investors.
“Crypto Insights - The Implications of Permissioned DeFi” - Cumberland, A DRW Company
Basically, companies do not want to leave assets idle on their balance sheet, and DeFi is a flexible way to generate yield. Segregated, permissioned pools give institutional investors confidence that all participants have passed KYC/AML standards
Using cryptocurrency for cross-border payments
Crypto assets and the blockchains they live on enable transparency, revenue-sharing activities, and money transfers to take place in real-time. Cryptocurrency and digital assets offer more control over capital and allow companies to manage the risks associated with these investments. For example, let’s look at a technology company with operations in Paris, France and Lagos, Nigeria, and customers worldwide using their Software-as-a-Service. Income to the business will likely come from payment cards and their merchant account in Paris will land all the value in Euros. Now they want to pay employees twice a month. Payroll in Europe is pretty simple, but what about the team in Nigeria and freelancers from other regions in Africa? Keeping bank accounts in all those different countries and currencies has a lot of overhead, and international wire transfers can take days. Instead, with blockchain-based services like TEMPO or BitWage, money can be converted and sent on-the-fly to cover operations and payroll almost anywhere in the world.
For international transactions, digital currencies offer a borderless, transparent, and secure way of processing payments. Digital currency also helps mitigate the risk of payment issues as these transfers operate in a no-trust environment and provide proof of funds. Global businesses can instantly settle accounts in multiple Stablecoin currencies without the need for correspondent banking services and slow, expensive international wires.
For companies with vendors and suppliers in different countries, international wires are expensive and slow, especially when goods are awaiting shipment or services are needed urgently. Let’s say a shop in London sells Turkish cotton bath towels. Every season they order a shipment to come from their vendor in Ankara, Turkey. Sometimes the payment gets held up by the correspondent bank during the SWIFT process. Untangling the mistake on one form or a missed confirmation phone call can delay shipment by a week or more. Instead, the shop owner can use a service like BitPay or simply send the money directly to a digital wallet provided by the Turkish company. Money arrives almost instantly, and those fluffy towels are en route to London right away.
With more and more use of digital currencies for cross-border payments, international payroll, and earnings opportunities, it makes sense that corporate treasurers would look at DeFi. Crypto assets on their own can provide alternative investment options, and combined with the DeFi protocols’ yield, a hedge against inflation. Simply holding Stablecoin representing foreign currencies that are involved in a global enterprise can be an effective strategy for settling value across accounts and managing forex risk.
Companies with the most Bitcoin on their balance sheets
Microstrategy (MSTR) - The analytics platform company holds the top place for a publicly-traded firm owning the most bitcoin (BTC-US), adding to its position time and again. MicroStrategy has spent $3.2 billion on bitcoin to date, holding 114,042 bitcoins for an average price of $27,713.
Tesla (TSLA) - The electric vehicle giant invested in bitcoin earlier this year. Tesla's $1.5 billion initial investment in the cryptocurrency, revealed in an SEC filing on February 8, sent prices higher. As of March 31, the company owned 42,902 bitcoins.
Galaxy Digital Holdings (BRPHF) - Michael Novogratz’s investment company focuses on digital currencies. As of March 31, Galaxy Digital held around $761 million worth of bitcoin.
Voyager Digital (VYGVF) - The crypto trading app owns 12,260, according to bitcoinworldwide.com, with a current value of about $700 million. In January, Voyager Digital's CEO Steve Ehrlich predicted this year crypto would go mainstream.
Square (SQ) - Square owns about 8,027 bitcoin with a current value of about $500 million. Other companies that have bought bitcoin include Marathon Digital (MARA), Coinbase (COIN) and Mercado Libre (MELI), among others.
Find the right digital asset partner
If your organization decides to allocate treasury holdings to cryptocurrency or another digital asset, it’s important to find trusted partners for services such as custody, OTC trades, DeFi protocol access, and portfolio analysis. When considering partners: Does this company operate at scale, who else have they served, do they have an excellent track record, and are they ready to deliver?