Cash is Dead. Long Live Bitcoin*

*Other digital assets are available

When BCB Group, a crypto-dedicated payment services provider, launched BCB Treasury in February 2021, its aim was help corporate treasury departments invest in digital assets. TMI spoke to the firm’s Chief Growth Officer, Ben Sebley, about the platform and the wider impacts of treasury’s adoption of Bitcoin and other crypto currencies.

By now, the majority of TMI readers will have heard how major tech firms MicroStrategy, Square and Tesla have ploughed billions into bitcoin. Whatever the direct financial effects of these investments on their respective businesses, the impact on the wider economic environment has been sizeable.

Indeed, more businesses are beginning to seriously float the idea that they too could have digital assets on their balance sheets. It’s a stark contrast even to just a couple of years ago, when few self-respecting companies would touch the likes of Bitcoin.

The actions of MicroStrategy, Square and Tesla, who together have bought $3.9bn worth of Bitcoin, have now added something significant to the argument ‘for’ digital assets as a corporate treasury investment. The current market backdrop supports this adoption, says Ben Sebley, Chief Growth Officer, BCB Group.

Clear drivers

The spectre of inflation and a generally higher cost of capital are conspiring with low-yielding returns on traditional corporate investments to steer treasurers towards new ways of generating returns. The reason is simple: holding large pools of excess cash has become very expensive.

Of course, Bitcoin falls well outside of the boundaries of normal assets, but it is an asset that is generating returns, says Sebley. In 2020, it was many times that of the S&P 500 Index and gold, pitching 160.40% vs 13.73% vs 21.60% respectively according to CoinDesk figures.

Although Bitcoin returns are legend, their volatility is too. But says Sebley, “we’re now in a state where the market is sufficiently mature for it to be considered an active investment, and now the infrastructure exists to buy and hold it safely”.

What’s more, he adds, there is now far greater regulatory clarity in most western jurisdictions. “It’s not always perfect, but it is certainly enough for investors with the will to shape their activities in terms of diversifying their assets.”

With the right market backdrop, the mechanism to manage investments, and the regulatory machinery in place, there is now what might called a supporting precedent as the likes of  MicroStrategy, Square and Tesla take bold steps forward into this space. With traditional fund managers such as Mass Mutual, and university endowments from Harvard, Yale and Brown making allocations in 2020, Sebley believes these are actions “shaping the narrative that serious organisations are now on board”.

Now there is progress being made in the central bank digital currency (CBDC) space too, Banque de France making the world’s first successful live settlement of a fund using CBDC tokens in December 2020. It appears that the wider use of digital assets is now firmly on the agenda and treasurers should at least evaluate the options.

Right questions

Due diligence requires a methodical investigation of the impact such investments may have on different business units and jurisdictions of operation, and how these investments might be reflected in policy and procedural approaches. The intentions of use (will it be an operational tool for payments or a speculative investment, for example) should be evaluated, as should the tax and accounting treatments of digital assets. Further practical questions relate to their purchase, holding, managing and accurately reporting of digital assets.

The latter practical matters have been the driver for launching BCB Treasury, but Sebley recognises that reporting is currently perhaps the most challenging issue for treasurers. With every company, sector and jurisdiction likely to want investments recorded with different nuances, he explains that the platform’s developers have had to incorporate flexibility and “an element of bespoke tailoring” in its setup. Data relating to transactions will be plentiful, he notes, but users must discuss and consult on content and format before proceeding.

The nature of digital asset custody remains open too. Bitcoin corporate investments range from thousands to billions of dollars. At the lower end of the scale, some companies might prefer to retain custody of their digital assets, notes Sebley. “But we always caution smaller companies, who might think they are only allocating 100k, that while that might be its current value, it could quite easily become a seven-figure amount next year.”

Indeed, keeping high values on internal hardware or some form of nano-ledger might not be appropriate. Custody therefore needs serious consideration, BCB Group always recommending ‘cold’ storage with one or more third-party custodians.

Cold storage is generally good for infrequently-accessed data. It is stored on slower media that literally generates less heat than its ‘hot’ quick access counterpart. This means a decision must be made by the corporate investor either to leave its assets in cold custody, or to try to actively generate yield, usually through a collateralised lending programme. Ultimately, custody decisions will be based on overall attitude to financial risk.

Fit for purpose

Arguably, anyone investing in Bitcoin will harbour a bold attitude to risk; it has undoubtedly had a chequered past, especially around money laundering. But, says Sebley, when government agencies capture Bitcoin for nefarious activities – “something that happens less and less these days” – they know they can trace its movements. This cannot be done so easily with cash.

“For the most part, we think much of the regulatory uncertainty has been addressed quite comfortably,” he comments. For him then, the established view that Bitcoin is the criminals’ friend is diminishing largely because the infrastructure and the regulation surrounding it has been tightened in recent years. Of the latter, he says “in more developed jurisdictions there is now enough regulatory clarity for CFOs to know what to do with digital assets”.

For businesses struggling with poor returns on traditional assets, yet still holding on to views of crypto as being in some way roguish, the message is clear: the world has changed and the digital asset has changed with it. And, as Sebley and others in this space note, “it’s not going to go away”.