Digitising the treasury toolkit: charting a crypto course
Despite some recent headline-grabbing allocations to bitcoin by high-profile companies such as Tesla, MicroStrategy and Paypal, the learning curve around cryptocurrencies is still a steep one.
Most corporate treasurers and chief financial officers are new to the existence, application and potential of these assets. Inevitably, therefore, there are a few red flags stemming from risk management headaches such as volatility, speculative gains and losses, and storage and settlement mechanisms.
At the same time, such uncertainty, or scepticism, is to be expected. “These dynamics are not unprecedented for a new asset class, with the early days of technology stocks being a good reference,” explains Ralph Payne, chief financial officer at Copper.co, speaking as part of the webinar.
For cryptocurrencies in particular, he predicts volatility will reduce over time as adoption by companies increases and the asset class is used more uniformly.
Most likely, it seems, is a gradual engagement and comfort among treasuries when it comes to the role and use of bitcoin and other crypto assets on corporate balance sheets.
“We hear a lot of myths about how crypto assets work and where the value is derived from,” says Rajagopal Ramamoorthy, finance director and chief financial officer for Tesco, Bengaluru, also speaking in the webinar.
The key for a treasurer, he explains, is understanding why to take exposure, what the value proposition is, how to access it and how to manage downstream risks. “Crypto assets are niche at the moment, but most treasurers should be watching and observing them.”
Proving its value
Born out of the 2008 global financial crisis – with the objective of creating a currency or unit of value not controlled by any central bank – bitcoin is certainly not new. And only 21 million coins will ever be produced, says Payne.
As a result, he believes this gives bitcoin a reliable store of value. “However, there is a lot more to bitcoin and other cryptocurrencies than just being the equivalent of digital gold.”
Among its characteristics is its role in enabling holders to own and control these assets. For example, accessing wallets of cryptocurrencies requires a private key to control the flow of funds in and out of that wallet. Further, Payne sees cryptocurrencies as having already moved beyond the perception of being a way to invest for speculative gains.
He identifies three core reasons for treasuries to shift a small portion of cashflow into crypto assets:
- By looking to allocate between 0.1% and 1% of their liquidity to bitcoin and other cryptocurrencies, treasurers can learn about the assets and how they work
- Treasurers can expect to generate higher yield from these assets compared with mainstream options
- Treasurers can start to take crypto payments from customers – which, in the B2C segment, can open new paths for business going forward
A patient approach
A wait-and-see stance appeals to Ramamoorthy from Tesco, Bengaluru. In fact, he sees the potential evolution of crypto assets as akin to e-wallets – five years ago, these weren’t part of the treasury tool-kit, but today, most businesses accept e-wallets. “This is mostly due to customers demanding e-wallets as a means of payment. Cryptocurrencies might well be at a stage [today] where e-wallets were five years ago.”
Since, in his view, a treasurer’s main responsibilities are safety of funds, liquidity and return on assets, bitcoin and other crypto assets will need to become less volatile to gain meaningful traction. Further, he adds, the use case will become stronger once customers start asking to make payments via this route.
Progress will also come in line with comfort among company boards with having a crypto set-up in their treasuries. “To deploy crypto assets, any large organisation will need to be clear about the need they can address that alternative mechanisms cannot provide,” says Ramamoorthy.
Some of the common questions, for example, relate to where it gets stored, how it can be converted back into hard currencies when needed and to whom it is transferred for B2B payments.
As a result, in addition to the tried-and-tested risk management principles that treasuries apply to any investment decision, allocations to crypto assets will likely require patience, until there is more clarity about the direction of their development.
Such decisions also can’t be made immediately. Indeed, treasuries should start tracking these assets now if they intend to take exposure in 12 months’ time.
Taking steps to action
Regardless of hurdles, Ramamoorthy believes crypto assets should be on the radar of every single corporate treasurer.
They also need to bear in mind the transformational impact that blockchain technology, in general, will have on supply chains and banking systems in the coming years, adds Payne. As a result, he advises treasuries to take small allocations to start to learn more about these assets.
Steps that regulators are currently taking to give clarity over legal frameworks, and to ensure market participants manage crypto assets appropriately, offer additional evidence that the asset class is here to stay.
More broadly, Payne’s best estimate for the pace of maturity of crypto assets is around five years. “We will then see more stable prices based on wider adoption among the corporate treasury community,” he adds.
Click here to listen to the on-demand version of the webinar