Treasury Today Country Profiles in association with Citi

Bitcoin: the treasurer’s next big headache?

Close up of Bitcoin

Corporate acceptance of Bitcoin is on the rise, according to a recent statement from ratings agency Fitch. But can the companies who use the currency cope with the risks?

Ever since Bitcoin first began to gain in popularity, people have wondered whether the crypto-currency has what it takes to establish itself as a major digital payment method. In the past few years, use of the currency has indeed been growing. But before it can reach a level anywhere near critical mass, everyone knows it will first have to achieve greater acceptance from businesses. After all, what good is a coin – digital or otherwise – if one cannot use it to purchase anything?

There are some signs of corporates beginning to take interest, particularly those in the e-commerce space. In early July, Fitch Ratings said in a press release that corporate acceptance of Bitcoin was on the rise, pointing to announcements from a range of companies, including the likes of travel website Expedia, who are now said to be generating meaningful revenue from the currency.

It’s not exactly a revolution though. “If you look across the corporate world, adoption of Bitcoin is still extremely minimal,” says Arun Ramamoorthy, Cash Management Product Manager for Fundtech in the US. Although the number of e-commerce companies now accepting the currency is beginning to grow, he says, within these companies, the payments they are processing are still relatively small, measured against their overall volumes.

But corporate treasurers, particularly those at e-commerce firms, should certainly keep a watchful eye on the currency, just in case they one day find themselves managing it and all the risks that are associated with it. And those risks, as a recent paper from the European Banking Association (EBA) on virtual currencies details, are manifold. In an opinion addressed to policymakers, the EBA listed a total of 70 different risks surrounding virtual currencies like Bitcoin, including accounts being hacked, counterparties failing to meet payment terms and failures by virtual currency exchanges.

A treasury concern

But which risk is most likely to keep treasurers awake at night? Price volatility could be a concern. Since the market for Bitcoin is a lot smaller than normal FX markets, the swings in value can be enormous. While daily volatility for the world’s fiat currencies averages at around 0.8%, for Bitcoin that figure is a staggering 15%. However, Ramamoorthy believes treasurers will not treat it any differently from their regular foreign exchange exposures. “Yes, it is going to be a big headache, but most sophisticated treasuries will know how to handle it,” he says. In fact, tools are already being developed – such as this nascent Bitcoin derivatives market – to help firms and other Bitcoin users to manage such risks. But even with the ability to hedge, not every company will find the level of risk, and the cost of hedging it, acceptable. “Since Bitcoin is a lot more volatile than any traditional currency, it will depend upon how much exposure the company wants to have at any one time,” Ramamoorthy says.

An issue with a less obvious solution for businesses is the lack of established, reliable exchanges. “You need to have a good place where you can buy and sell and a place to route all these transactions, and there are no reliable exchanges at the moment,” Ramamoorthy explains. Tokyo-based Mt Gox was the biggest exchange, handling, for a time, around 70% of all Bitcoin transactions. That was until February, when trading had to be suspended and the company then began liquidation proceedings, in controversial circumstances. That event highlighted the magnitude of the settlement risk associated with Bitcoin to everybody. If the stock exchange that equity traders used went bankrupt, the traders would not stand to lose anything. But if a Bitcoin exchange goes bankrupt it is a very different story. “National currencies at least have some backing from a central bank,” says Ramamoorthy. Even if the bank goes bust the deposits and loans are going to be taken over by somebody else. But, of course, there is none of that with Bitcoin.”

Who needs to prepare?

Bitcoin acceptance amongst corporates is growing steadily. But, that said, adoption across the board is certainly unlikely at any time in the foreseeable future. So for now, only treasurers of a certain type of company need to begin thinking about how they would manage the currency. “If you are in the retail space and large enough to handle price volatility then the company may decide to experiment with it,” says Ramamoorthy. “But if your company is not in the retail space, and you are a smaller player, then the company will probably want to stay away, for now.”