Insight & Analysis

Bitcoin’s rise: treasury implications

Published: Jan 2021

As the hype increasingly turns to reality, bitcoin’s rise flags opportunities to treasury teams around new Central Bank Digital Currencies and payment opportunities based on blockchain technology.

The rise of Bitcoin, picture showing a chart

Although bitcoin has lost ground in recent days, it is impossible to ignore its rise. The digital currency has soared eightfold since last March with recent valuations topping US$40,000 a coin compared to US$5,000 nine months ago. It is a rapid rise from its 2009 launch as a decentralised, democratic alternative to traditional tender, ungoverned by any state and operating on peer-to-peer networks.

The original idea that bitcoin would be perceived as a ‘digital gold’ and trusted store of value and haven in uncertain times is becoming more of a reality as investors pile in. Fearful that central bank strategies are hurting the value of their currencies and inflation is coming, investors are beginning to see bitcoin as a legitimate source of diversification and hedge against inflation.

Treasury

Bitcoin in itself, does not offer anything to corporate treasury teams at this stage of its evolution. But it will begin to appear in treasury in important ways, predicts Haydn Jones, Director, Senior Blockchain Market Specialist, Technology & Investments at PwC.

For example, he notes that the institutional interest in gaining exposure to bitcoin as an asset class - as mirrored in its price rise - could lead to treasury teams receiving more queries around the currency. “It wouldn't surprise me if treasury teams start receiving queries relating to the execution of payments for the purchase of Bitcoin,” he predicts.

Other experts flag future developments like more companies, some sitting on significant cash piles, seeking to hedge their cash position using bitcoin in a move away from traditional inflation-hedging allocations like gold and inflation linked bonds. Companies with a young customer base who understand and probably hold bitcoin, will be first out of the starting blocks.

Although most bitcoins are held as an investment and not used to pay bills, it is starting to change. Last October payment company PayPal and its Venmo subsidiary started storing bitcoin with a view towards accepting it as payment, making its use as a form of money more feasible. Elsewhere, smaller businesses are beginning to use bitcoin in international trade, particularly in countries where dollars are scarce, or the local currency is unstable. Monthly cryptocurrency transfers to and from Africa of under US$10,000 - typically made by individuals and small businesses – have more than doubled over the year according to data from US blockchain research firm Chainalysis. Much of the activity took place in Nigeria, the continent’s biggest economy, along with South Africa and Kenya.

CBDC and stablecoins

Despite these evolutions, Haydn believes the real importance of bitcoin for treasury teams lies in the new central bank currencies it is encouraging. The rise of bitcoin has paved the way for Central Bank Digital Currencies (CBDC) and so-called stablecoins, cryptocurrencies that attempt to peg their market value to some external reference like the US dollar or to a commodity's price such as gold. Companies will increasingly start using CBDCs and stablecoins, and both will soon offer much to treasury teams in terms of payment frameworks, he predicts. “CBDCs give the ability to combine different payment and settlement rails, bringing an improvement in operational risk.”

Momentum is coming from UK Chancellor Rishi Sunak who recently highlighted the opportunity for CBDCs. Last November he pledged that the UK would lead the global conversation on these new technologies. Elsewhere the government has just issued a consultation on the use of stablecoins on the basis that that they could lead to faster, cheaper payments, making it easier for people to pay for things or store their money.

DLT

But these developments are still a way off. For now, Hayden believes that the bitcoin and digital currency craze will manifest most around companies using the blockchain technology on which it rests than using digital currencies per se. Blockchain technology combines the ability to store value, record that value in a ledger and securely move it from one person to another as well as attach nested conditions related to a contract. “It is more about corporates using blockchain to solve problems relating to the provenance of a supply chain, or recording a certificate of origin,” he says. A recent PwC report on the economic impact of blockchain argues that it has the potential to boost global GDP by US$1.76trn by 2030.

Of course, treasury caution around digital currencies as an investment or payments and transfer vehicles will remain. Companies find it hard to feel safe allocating a portion of their treasury to an asset that is so volatile. Bitcoin’s daily price swings are still four times larger than gold, imposing greater short-terms risks than a potential risk of inflation. And using bitcoin involves expertise around secure wallets and new systems, meaning treasury teams can’t just accept it. But as bitcoin and the technology behind it once again grab the headlines, it won’t be long before it rises up the treasury agenda.

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