Corporates investing in crypto has been saved
Corporates investing in crypto
Considerations regarding allocations to digital assets
More and more operating companies have begun allocating cash to digital assets and crypto currencies. This is a new dynamic and a departure from more conventional investing by funds and others in this space. How would you do that? Explore these guidelines for the relevant questions, processes, and procedures supporting such a decision.
In 2020, more operating companies began allocating cash to digital assets and cryptocurrencies. This is a new dynamic and a departure from more conventional investing by funds and others in this space. One telling example is MicroStrategy Inc., which announced, last December, that it had made more than $1B in total Bitcoin purchases in 2020, a move that it characterized as an investment that would “provide the opportunity for better returns and preserve the value of our capital over time compared to holding cash.”1 Some companies have followed suit, and others may now be wondering how to invest in Bitcoin and other digital assets. There are a variety of reasons for adding digital assets to a company’s balance sheet, whether it’s seeking asymmetric risk return observed over previous years or as a natural hedge against fluctuating fiat currencies; whether it’s part of a corporate strategy to embrace modern, open technologies; or as a complement to an operational strategy that includes accepting digital assets as payments.
This paper focuses largely on Bitcoin investments, considering recent increased investments in Bitcoin, and its common reference as a store of value. It should be noted that there are numerous types of digital assets, each having their own unique characteristics. Ethereum is also viewed as a store of value, with the added use of enabling transactions on Ethereum-based decentralized applications. These contrast with central bank digital currencies (CBDCs) and stablecoins, which are digital representations of fiat currency. Their value is derived from an actual currency in circulation, and they are issued by a central bank. Equity and derivative tokens are digital assets whose value may represent actual corporate stock or a legal right to another asset or financial instrument. Some digital assets have additional attributes, such as voting rights on a protocol, or they may provide a level of access for participation in a decentralized application. These may provide some commercial or economic benefit to the holder. Prior to investing in any digital asset, it is important to understand the specific terms, conditions, and characteristics of the investment since those will affect accounting, tax, risk, controls, and legal considerations, among others.
What follows here, then, is some guidance on what undergirds any corporate decision to invest in digital assets like Bitcoin. In addition, we set out the ongoing actions that teams across a company should undertake to monitor and go forward with a long-term investment. In other words, our goal is to answer the question “How would you do that?” rather than “Why do it?”
Before proceeding, we want to make one point absolutely clear: There is no playbook or foolproof approach for these kinds of bold moves. There is only painstaking effort, disciplined analysis, fresh thinking and rethinking, dedicated collaboration across competencies, and, above all, rigorous execution. What follows, then, is not a step-by-step prescription, but instead a high-level guided tour of the wide terrain companies should cover when they are considering investing in Bitcoin. Additionally, note that what is stated here cannot necessarily be extrapolated to all digital assets, given that they have many different characteristics.
The high-level view from treasury
The main purpose of the treasury function is risk management and the preservation of capital. When deciding and executing on an investment in digital assets, governance is key to all activities. More than creating a policy, governance begins with understanding the types of investment the company is making and where this alternative investment vehicle—digital assets like Bitcoin—fits within the broader investment strategy. Leaders also need to be comfortable with the characteristics and nature of the vehicle. (More on this below in the discussion on controls.) Given that it’s a financial investment, it’s imperative that the treasurer, CRO, CEO, CTO, and board of directors all have a clear assessment and understanding of the asset’s risk profile, the company’s tolerance for risk, and how these two may align or diverge. Ultimately, governance is all about monitoring and assuring that the conditions and requirements set by the organization are maintained.
Tolerance for risk, depending on the stake and type of digital asset, may well have to be modified and periodically adjusted. Risk tolerance takes several forms and requires decisions on issues such as the following:
- What percentage of the cash on hand, after accounting for operating costs, will be assigned to alternative investments in digital assets?
- What range of risk is the company comfortable with? Governing risk is rarely a matter of “set it and forget it.” Risk is a constantly moving target, and adjustments frequently need to be made within an agreed-upon band of risk tolerance.
- With digital assets, treasury needs to consider not just the investment side, but also how these assets may figure into daily operations such as payments, debt management, raising funds, IPOs, etc.
- How can treasury be more strategic in using these assets to advance efficiencies in payroll, vendor payment, trade, customer interactions, and cross-border transactions with subsidiaries and others? (More on this last point when we discuss accounting and tax implications, as well as controls, below.)
Of course, the first and final refrain for treasury must always be that the governance of digital assets is a living and adaptive process. It constantly follows and must adjust to market and risk realities.
Note: Liquidity is not necessarily a major issue, especially if the company is adopting a longer-term investment mindset. Nevertheless, there needs to be appropriate provision for extra cash on hand. And assuming investments are layered in progressively over time, liquidity is likely to be less of an issue.
Yet, in the event of the need to liquidate assets, the company needs to know if the facility to do so is available without a premium penalty or if the transaction can be executed without a depreciation of the assets’ value.
Global macroeconomic, monetary, and digital evolutions have converged, requiring all forward-thinking corporations to consider alternative assets on their balance sheet. The ecosystem and the regulatory environment for digital assets, especially Bitcoin, have matured to the point that this strategy is becoming approachable and mainstream.
—Phong Le, President and CFO, MicroStrategy, Inc.
Accounting and tax: Potential opportunities for alignment, challenges of divergence
It should be obvious from our discussion that risk and controls are at the very foundation of any investment project in digital assets. Let’s quickly review the main areas that should be on the radar.
What has pleasantly surprised us in the process is how encouraging and welcoming the digital asset community has been. Longtime Bitcoin enthusiasts, macroeconomists, and luminaries; blockchain and technology fans; financial institutions, exchanges, and custodians; accounting, tax, and legal experts; and retail and institutional investors and shareholders have all emerged at scale to support and champion our efforts. The combination of these groups’ support, as well as our own internal vision, strategy, and teamwork have led to our initial successes.
—Phong Le, President and CFO, MicroStrategy, Inc.
The need for cross-organization collaboration
Any sizable investment in digital assets presents more than just technical issues related to treasury, accounting, reporting, tax, and controls. It also involves a significant cultural realignment—internal and external—among the many different groups and departments, including, but not limited to, the board of directors, the audit committee, risk, corporate reporting, finance, tax, internal audit, operations, controls, technology, and investor relations. Since many of these departments interact with external parties, such as the external auditor, tax and legal counsel, etc., it is vital that there be a corresponding realignment in thinking when dealing with these external groups.
What does that realignment entail? Typically, the various functions and departments of a company establish procedures and assumptions for collaborating across and outside the organization based on normal-course, well-understood transactions. The terrain of digital assets is a new frontier of possibilities, so it requires that each corporate department, and its external party, rethink the application of the rules and policies of its core competency. Few of the norms associated with legacy investments in securities, fiat currency, or treasuries may apply. Once each group gains a level of comfort with the application of the rules to digital assets, they then need to actively listen to one another, gain an understanding of the sensitivities, evaluate any operational or technical dependencies, and finally rethink how they collaborate and tackle challenges together.
Many more operating companies are beginning to evaluate the potential benefits of investing in digital assets like Bitcoin. And as their cumulative experience grows and sparks further interest, the more likely strategic investments in digital assets are to become more routine realities. That said, companies must have the right risk measures in place, as well as the right risk tolerance levels, for it to be worthwhile pursuing this type of investment. For certain, the realities facing operating companies interested in investing in such assets are complex and in flux. But they are navigable with the right level of commitment from all departments and external parties. And with appropriate attention to issues of process, procedures, and risk all along the decision spectrum, digital assets can offer innovative, bold, and dynamic alternatives to traditional investments.
Our thanks go to Phong Le, President and CFO of MicroStrategy, Inc. and to Jeremy Blank, Deloitte lead client service partner serving MicroStrategy, Inc., for their support in writing this paper. The authors bear sole responsibility for the content and views expressed here.
2 The FASB decided at its October 21, 2020, meeting not to add a project on digital currencies to its agenda.
3 That assumes that the company is not required to apply specialized industry guidance, such as the guidance in ASC 946 Financial Services – Investment Companies.
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