So far, the treasury interest in digital assets has focused on investing, and mostly in bitcoin. Now, however, attention is turning to other kinds of digital assets and not just for investing; they have the potential to transform how treasuries – if not whole businesses – are run.
Legendary rocker Rod Stewart once gave Elton John a fridge for Christmas. Not any old fridge, mind you, but the latest one at the time. He’d spent £600 on it – which was a lot back in the 1970s – but when his fellow musician reciprocated with his gift, it paled in comparison. “He gave me a Rembrandt painting! I’ve never felt so stingy,” Stewart reportedly said.
Now in the era of digital assets, such a mismatch in generosity could be solved with tokenisation. Now you could buy a portion – the equivalent of £600’s worth – of the painting and make an illiquid asset easily tradeable. Or perhaps you want to do away with physical paintings and venture into the world of digital art. A non-fungible token (NFT) of Melania Trump’s eyes, a digital watercolour that is selling for 1 Solana (approximately US$180), perhaps? This seems like a bargain when compared to ‘Everydays – The First 5,000 Days’ by Beeple, a collage of 5,000 digital images that sold for US$69m at Christie’s in March 2021.
When it comes to digital assets, treasurers aren’t looking to the art world for their investment strategy, but they are considering other types. “People are being cautious, but at the same time they are also curious about this asset class,” says Manoj Ramachandran, Principal of Digital Assets at BNY Mellon.
The US-based bank has got involved in this space – with its Digital Assets unit – in response to client demand. Also, Ramachandran says, “the timing is right” because there is now greater clarity around the custody of digital assets. And there is also an emerging ecosystem of fintech providers that can support the development of various digital asset products.
“I would not say everyone is thinking about it – they are at the very early stage with their allocation of this asset class,” says Ramachandran. “I think it will be a few years until this is mainstream from a corporate treasury perspective,” he adds.
So far, the interest has been mostly on investing in cryptocurrencies, and Ramachandran notes that corporate treasurers became more interested after seeing companies like Tesla and MicroStrategy investing in bitcoin.
Anatoly Crachilov, Founding Partner and CEO at Nickel Digital Asset Management, comments that it is natural – given the nature of their business – for treasurers to be conservative when it comes to digital assets. “They have to be mindful of liquidity,” he says. If it is their first foray into investing in digital assets, they are most likely to venture into crypto and its most liquid asset: bitcoin.
Such an investment is increasingly being considered by corporate treasurers. For example, Nickel Digital Asset Management found in December 2021 that growing numbers of listed companies were investing in bitcoin. Their analysis revealed that 20 listed companies with a market capitalisation of over US$1trn have approximately US$9.3bn invested in bitcoin, after originally spending US$5.8bn. Geographically, the bulk of these companies – 13 out of 20 – were in the US or Canada.
For many, an investment in bitcoin makes sense for a treasurer’s portfolio. In a previous interview with Treasury Today, Brad Yasar, Founder and CEO of EQIFI, had something of a rallying cry of “Buy bitcoin!!” Even for those who aren’t believers in the cryptocurrency, he argues, they should think of an investment in bitcoin as an insurance policy.
Crachilov makes a similar case for investing in bitcoin for treasurers who may still be reluctant: if you allocate a small portion – 1% – the upside can still be significant, without being too exposed to the volatility. “Sizing matters,” says Crachilov, when it comes to a bitcoin allocation. He illustrates by comparing a traditional investment portfolio of 40% bonds and 60% equities, which are invested in the S&P500, to a portfolio that includes 1% and 59% equities. He tracks their performance over a nearly nine-year period from 31st December 2012 to 30th September 2021.
The traditional 40/60 portfolio had a cumulative total return of 144.3% (annualised return of 10.4%) over that period, an annualised risk standard deviation of 9.8%, and the maximum drop – or drawdown – was 21.6%. If the portfolio is adjusted to include 1% bitcoin, the cumulative total return increases to 170.8%, the risk is 9.9% (not much of an increase), and the maximum drawdown remains the same. This drop is the same because the biggest decline was in March 2020 when there was a sell-off because of Covid. Crachilov argues that a treasurer could enhance their portfolio by including bitcoin – an uncorrelated asset class – because historically it has behaved differently from the equities market.
If a treasurer is feeling braver and increases their bitcoin holdings to 3% there would be a cumulative total return of 232.2% – a much larger figure – but the risk increases to 10.1%. At this point Crachilov says, “The benefit outweighs the risk – that is the beauty of this.” However, he notes, as you allocate more and more crypto, “At some stage it is way too risky – a single digit allocation makes perfect sense,” he adds.
Also, Crachilov argues that bitcoin has a role to play in an investment strategy if you are looking to protect against currency debasement, where the value of the currency is lowered. He points to the figures for the M2 money supply, which increased by 28% between December 2019 and December 2020 to US$19.5trn as part of the US pandemic stimulus. The only other time the M2 indicator has been this high, he says, is in 1943 when the US undertook a stimulus programme as part of World War 2. At that time, M2 increased 27%. Initially, the impact of that stimulus had a subdued effect on inflation. However, it came with a three-year delay and by 1946 inflation was 18%.
“Bitcoin is the logical choice” for protecting against this scenario, says Crachilov. Bitcoin has a “non-discretionary immutable monetary policy” which means that no entity can affect its supply. Approximately 90% of bitcoin has been released and the remainder will enter circulation according to a fixed schedule over the next 120 years. Investing in an asset like this provides a hedge against the US dollar becoming devalued, says Crachilov.
And for those who are still reluctant to invest in bitcoin because of its volatility, Crachilov argues that you don’t need to be a believer in its value increasing. Instead, you can trade on its nature as a volatile asset and invest without taking a directional view, and rather harness its swings in volatility.
Beyond bitcoin, there are other cryptocurrencies that are of interest, such as Ethereum. This is a more dynamic asset as it is upgraded more regularly. Also, it has a whole infrastructure of smart contracts, and is an interesting investment for those looking to diversify, says Crachilov. And for the more adventurous, there is investing in decentralised finance.
This is the space that Yasar’s EQIFI plays in, which is positioning itself a leader in the field, with a single platform for banking, trading and lending for fiat and cryptocurrenices. The defi platform is connected to a regulated bank (EQIBank) so that high-net worth individuals and businesses are able to transfer their digital assets from the platform into the regulated banking system.
Digital assets have many forms, and corporate treasurers’ interest is now looking beyond the simple investment strategies of bitcoin or other cryptocurrencies. BNY Mellon’s Ramachandran comments that there is demand from treasurers in other assets, such as tokenised cash as well as tokenised bonds.
Also, with offerings like PAX Gold, for example, it is possible to buy gold as a digital asset where one token – on the Ethereum blockchain – corresponds to one ounce of physical gold that is stored securely in a vault.
Tokenisation means that a physical asset can be transformed into parts – tokens – that are digital and can be used as proof of ownership or traded. They can make assets that are typically illiquid, such as property or paintings, more liquid by making it possible to invest in a portion of them. If you need US$50,000 urgently, you could sell off a portion of your home – by dividing it into 50 US$1,000 chunks for example – and allow a new class of investors to benefit from its rise in value. You get the cash you need quickly without having to sell your whole home. And the blockchain can cut out the intermediary, making it possible to do such a transaction without an estate agent or a solicitor.
People are being cautious, but at the same time they are also curious about this asset class.
Manoj Ramachandran, Principal of Digital Assets, BNY Mellon
Tokenisation has already been trialled in the property sector and a September 2021 study by Hamburg Commercial Bank and the Frankfurt School Blockchain Center (FSBC) found that 41 companies in 17 countries had already started to pilot tokenisation.
Dr Philipp Sandner, Head of the FSBC, comments on how digital assets is a broad class, and can include digital securities so that stocks and shares can be transferred using blockchain technology – which makes it more efficient for trading.
Ramachandran also notes there is interest in tokenised securities. He notes that from a financial assets perspective, any securities instruments have the “potential to leverage distributed ledger technology (DLT) to make the issuance and the transfer process more seamless and transparent – that is driving some of the activity in the market,” says Ramachandran.
And aside from the transfer of securities, there are other more ground-breaking uses of the technology. Sandner explains how it is possible for corporations to tokenise industrial assets, such as machines, tractors, planes, or trains. In the past, a company would have probably involved a leasing company so that they could afford to have access to such equipment. Now that model can be revolutionised because of the blockchain technology: it is possible to slice up the asset and offer it to a range of investors. And the asset could be thought of as a profit centre, which is paid for on a per-use basis. Using the internet of things, the machinery could have sensors on it. These connect to the blockchain, which is also linked to a payments engine and accounting software, so a transaction occurs every time it is used. Such a way of doing things has the potential transform how corporate treasurers work, says Sander. “This transforms how they think about the financing of assets,” he says.
In this kind of innovation, Sandner says, treasurers have a key role to play. They often underestimate the role they have to play in innovation, he adds. “Blockchain is very often related to finance – this makes the CFOs and the treasurers the people to drive blockchain adoption in companies,” he says. For anyone thinking they may be too far behind, Sandner says, don’t worry it’s not too late – you haven’t missed out. “Everyone can be part of this journey.”
