If you were facing the biggest disruption that financial services had ever seen, what kind of treasurer would you be? One who embraces innovation… or one who ignores it? That is a question treasurers could be asking themselves in the face of digital currencies and whether they have the potential to completely disrupt treasury services as they are currently known.
Treasurers differ in their mindset when it comes to digital currencies, comments Brad Yasar, Founder and CEO of EQIFI. There are those who have a positive outlook, who are exploring opportunities even if they are not getting involved in them right now. And then there are the more old-school types, who do not want to touch any of it. Of cryptocurrencies, these treasurers have typically heard J.P. Morgan CEO Jamie Dimon “bashing crypto” and see Tesla’s maverick CEO Elon Musk investing in it, and they look at crypto as something that will disappear, says Yasar. “But they have been looking at it as a ‘scam’ for the past 12 years. It has not disappeared, and it keeps growing. I do not think that camp gives it the time and attention it needs. Some people are completely anti alternative investments,” he says. And that is a missed opportunity, adds Yasar, who is a serial entrepreneur, and also founder of EQIFI, which is positioning itself as the leader in decentralised finance, and offers a single platform for banking, trading and lending for fiat and cryptocurrencies.
“This ain’t going away; it’s not a flash in the pan,” says Luke Sully, Co-Founder and CEO, Ledgermatic, on the topic of digital currencies and digital assets.
And treasurers are well placed to take advantage of digital currencies. In fact, if corporations are going to innovate with Bitcoin, cryptocurrencies, blockchain, stablecoins and the like, the natural place for that innovation to start is with the treasurer.
The first step is to perhaps consider Bitcoin as an investment. Earlier this year Tesla invested US$1.5bn in Bitcoin, and when that news broke, Sully –whose company Ledgermatic enables treasurers to manage their traditional and digital assets in one place – said he received a lot of calls. Although other companies, such as business intelligence Microstrategy and payments company Square, have also invested in Bitcoin, the uptake hasn’t been what some thought it would be. “We have not seen many companies put it on the balance sheet – that did not really take off, for a variety of reasons,” says Sully.
And for treasurers, there is a lot to consider. Michael Aandahl, Head of Digital Treasury at Ingka Group, the largest IKEA franchisee with 392 stores in 32 countries, has looked into the multi-faceted topic of digital currencies. The first question he asked was whether the group’s customers would be interested in this as a payment form. “We did not identify any immediate customer demand that is specific to our industry,” he tells Treasury Today. The experience of retailers, however, is likely to be different from corporates that are already in the financial chain– such as consumer payments companies – where digital currencies are already a hot topic and have more relevance in the near-term to their customer base, he comments.
Aandahl explains that Ingka Group also considered Bitcoin as an asset class. “We have had that discussion and we decided it is not for us for various reasons,” he says. He adds that Bitcoin as an investment does not fit into the classic treasury mandate. It was ruled out, especially given the environmental concerns about the mining process. From an ESG [environmental, social and governance] point of view, it was “not going to fly”, considering what the company values are, he says.
With Bitcoin as an asset, it’s not just the ESG concerns that treasurers are grappling with. Reporting Bitcoin on the balance sheet is a sophisticated accounting problem, says Sully. Also, there are the practicalities of managing a portfolio of crypto investments. If corporates do hold Bitcoin, it is likely to be held in siloed wallets on various exchanges, with little visibility – or controls, for that matter – about who can move it there. A “half-sophisticated” investor has probably got five to six different accounts on various exchanges, explains Sully, all of which aren’t related to anything else they are doing. This leaves a treasurer logging into one account at a time. “We thought this is a disaster for crypto hedge funds. Someone will want to know their position and it will take an hour to figure that out.”
Also, there is the issue of the changing value of crypto. As Yasar points out, “Crypto is continuous – the value continuously changes. It may change 20% in a day.”
Brett Turner, Founder and CEO of Trovata – an open banking platform that companies use for real-time cash forecasting, cash reporting and cash flow analysis – explains how it has helped one of its largest customers, Square, with its cryptocurrency holdings. Trovata’s platform enables it to know its cash position in real-time. Unlike traditional treasury management systems, which were typically designed over 20 years ago, Trovata leverages cloud technology, big data architecture and APIs to deliver real-time cash reporting to treasurers. When it comes to managing Bitcoin as a digital asset, treasurers would not normally be able to see this as part of their overall cash position. With Trovata’s solution, however, they can see the real-time value of the Bitcoin and know what the US dollar equivalent is at any point in time.
Square is unusual when compared to the typical company and most treasurers are still wary of investing in Bitcoin. “Because of the volatility concerns, very few treasurers are wading into it,” says Turner. Some treasurers, however, are updating their treasury policies so they can buy it. They are considering Bitcoin as a hedge against inflation, especially in a low-interest rate environment where they are searching for yield and rethinking their options.
There are still ways for treasurers to explore these options at arm’s length. They may want to have exposure to a fund of a fund that is invested in crypto, such as Pantera Capital or Galaxy Digital, for example, explains Yasar.
In terms of persuading people who are reticent, Yasar says, “Think of crypto as an insurance policy. Do not look at it as ‘I’m going to make money this is a solid investment’… If it is a complete scam, you paid your premium and nothing happened. But what happens if it disrupts your business? If you have invested – you have disrupted your own industry,” he says. And to EQIFI’s institutional partners he says, “Do not try to make a meaningful investment. Do a small investment and do it for the long-term – as an insurance policy.”
There are some corporations out there that are more forward-thinking than this. Another way to explore the potential of crypto, is to invest in an internal lab or exploratory group. Some companies may even put aside US$10m or US$20m for such a project, comments Yasar. This could include exploring how to mine Bitcoin themselves, which gives them certainty over the cryptocurrency’s provenance and knowledge that it has not been associated with illicit activity in the past.
So far, much of the focus on digital currencies has been on Bitcoin as a store of value, comments Turner. In terms of its function as a payment mechanism, Turner says there are inherent problems with transferring funds this way, “It can still take a few hours to settle,” he says of Bitcoin transactions.
Given this slow time to settle, it’s unlikely that Bitcoin would be used as an alternative payments network for a corporate’s regular transactions. For consumer-facing companies, however, they may need to consider Bitcoin as a payment form so that they can accept it from their customers. Yasar points out that it is possible for companies to accept Bitcoin payments from customers without holding it on the books and carrying the risks of volatility. There may be risk while the customer has items in their online cart, but once they check out – paying in crypto – companies can quickly divest out of it, explains Yasar.
When it comes to digital currencies as a payment method, there has also been a lot of interest in stablecoins, which are digital coins that are backed by a regular fiat currency to make them ‘stable’ and smooth out any volatility.
Turner expects to see stable coins being used more widely, especially as a means of payment. Private companies could effectively issue their own currencies. Sully expects to see the same. “People are doing a lot of building this year,” he says, adding it won’t take long before the most well-known brands are issuing their own coins. Such stablecoins could be used for loyalty schemes, for example, or perhaps an alternative to retailer-branded gift cards.