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Analysis

Treasury’s trajectory amid digital assets adoption

Creating  a bankable treasury strategy that optimizes opportunities

With worldwide revenue of digital assets projected to reach $102.7B and the number of users projected to reach 994.3M by 20271, having an extensive treasury strategy that adheres to the organization’s established policies, procedures, and risk tolerance blueprint has become an essential component of digital assets adoption.

Organizations that effectively deploy digital assets adoption strategies and solutions can significantly bolster their investment, operational, and transactional footprint globally, giving them a competitive edge. However, with this tremendous opportunity comes macroeconomic risk, as highlighted by recent banking collapses and instability of crypto exchanges. This emphasizes the importance of treasurers being involved during an organization’s digital asset adoption. Whether it be payment utilization of stablecoins, deploying digital assets to a counterparty via custodianship, or determining digital asset positions through pooling processes, many of these impacts encompass treasury operations. With durable procedures in place—whether it be hedging and derivative contracts, intercompany funding, treasury management system integration (TMS), balance sheet exposure tracking, internal controls, and much more—an organization can significantly reduce its risk and function more effectively.

Digital assets: A treasurer’s perspective:

Digital asset bridge: Custodians and wallets

Digital assets provide institutions the ability to become their own banks or custodians, more account management options, and the flexibility and accessibility to overall risk reduction based on wallets utilized.

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Custodians:

  • Traditional banking environment: In the current landscape, a custodian bank is a bank whose responsibility as a financial institution is to hold its customers’ securities for safekeeping to prevent them from being stolen or lost. A custodian bank may also hold stocks or other assets in electronic or physical form on behalf of its customers, keeping them safe by minimizing the risk of theft or loss.
  • Digital assets environment: This is similar to traditional banks, where one can store coins, manage liquidity, and protect assets from theft. Yet, just like physical assets, one has the option to store money personally using a non-custodial option where a corporation can protect itself and safeguard its assets by managing them directly via wallet or storage.

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Wallet management:

  • Traditional financial environment: A bank account renders services to allow financial transactions via applications or online software and is used for various activities ranging from paying bills to transferring money.
  • Digital assets environment: A digital asset wallet is the same as a traditional bank account; however, it has more options spanning hardware and online wallets, which provide a plethora of conveniences, including speed, transparency, simplicity, and accessibility. Digital wallets render traditional wallets/purses obsolete, and only a smartphone is needed to perform all management and POS (point of sale) transactions.

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Potential rewards and possible pitfalls

Traditional payment systems and liquidity management solutions are being complemented, and sometimes even replaced, by the emergence of digital assets and cryptocurrencies. While careful consideration must be given to regulatory, volatility, and security aspects, the potential benefits of enhanced efficiency, global accessibility, improved liquidity management, transparency, and innovation make them an intriguing option for forward-thinking businesses. As the landscape of finance continues to evolve, it benefits corporate treasurers to stay informed and nimble to leverage the opportunities presented by digital assets and cryptocurrencies.

TMS integration and interoperability

As digital asset use cases and real-world applications converge, the expressed need for integrated systems and platforms becomes essential. Organizations’ “technology stack” consists of software, tools, and frameworks to build and operate digital asset–related applications and systems. There are various considerations and advantages to be cognizant of when integrating Treasury Management Systems (TMS) capabilities with digital asset activity. While detailed consideration needs to be given to logical access management, platform design capabilities, and risk mitigation, the potential benefits of enhanced visibility, working capital management, data analytics, automation and robotic process automation, counterparty connectivity, and infrastructure and security create additional opportunities for the foreseeable future. As the digital asset arena continues to evolve, organizations with a soundproof, effective technology ecosystem will prosper and have the expertise to lead their businesses.

Treasury digital asset risk management

The next step in the risk management process is assessment, which consists of four main parts— quantification, likelihood, impact, and prioritization. Treasurers interested in digital asset capabilities should determine which digital assets are viable options for their unique business and assess those risks accordingly. After risks have been identified, treasurers quantify risk (where possible) to assess the notional amount at stake. Assessing risk may lead organizations to analyze and identify potential hazards should one occur. The potential for interruption of sensitive business processes is evaluated by the overall capacity of risk an organization carries, which can be remediated through additional risk management strategies.

The third step in the risk management process is implementing strategies to mitigate the identified and assessed risks and the subsequent continuous monitoring of those risks. Risk identification and assessment are the building blocks for risk mitigation and monitoring and provide a tactical approach to developing various methods to reduce threats or risks. Mitigation and monitoring strategies include incorporating treasury controls, ensuring the organization has the correct human capital and system automation to support innovative digital asset processes, and understanding the given liquidity of the business at any point in time.

To ensure proper credit facilities and backup financing are in place, multiple counterparties can be utilized in case digital asset allocations cannot be accessed. In the event of financial losses or illicit activities, automated parameters can be set through ratios or balances to highlight scenarios and sensitivities with non-base case effects. By applying this sort of logic to the overall mitigation and monitoring process, a treasurer can be better equipped to handle the nuances and inefficiencies that can occur with digital assets, deter illicit behavior, prevent massive financial losses, and further adversely affect the business.

The final step in the risk management process is communicating the overall results and generating reports based on the risks taken. Treasurers should be able to relay the outcomes to management and other individuals, such as the CFO, within the organization as well as externally to stakeholders if necessary. By reporting these outcomes on risk exposures, mitigation strategies, dollar impact, and so forth, treasurers can create an “audit” trail and a record of progress in addition to bolstering transparency and accountability. Communication and reporting considerations include both financial and non-financial aspects. This final step brings together the risk management process in a cohesive manner.

Other considerations

Proposed FASB ASU reporting requirements

Once issued, the new crypto asset ASU (Accounting Standards Update - Subtopic 350-60) proposed by the Financial Accounting Standards Board (FASB) will have a significant impact on companies holding digital assets in their treasury. Once issued, the new digital asset ASU will provide greater clarity and transparency into how companies account for and manage their digital asset holdings requirements (DISCLAIMER – Final standard expected soon).

Learn more
Continuous assessment of custodians used

Treasury functions need to evaluate the risks associated with their chosen custody solution. Additionally, a System and Organization Controls (SOC) report over the custodian’s controls should be assessed regularly to ensure that the custodian is addressing risks identified by the treasury function.

Considerations over data used in reporting

A treasury function may utilize reports from a custodian, sub-ledger solution, or third-party blockchain reader. The SOC report of a reporting solution can provide assurance that the controls are operating effectively and that standard reports are accurate and complete. Key queries, fields, and parameters used by a treasury function should be compared to the SOC report to ensure they are addressed and covered by the organization’s controls. The treasury function can enable key segregation of duties and logical access management controls in place to ensure the right users are accessing the correct data and the proper counterparts have the correct decision and reporting capabilities.

Determining appropriate pricing sources

In accordance with US Generally Accepted Accounting Principles (GAAP), the fair value of an asset should be derived from its principal market (the market with the greatest volume and activity for the asset). The validity of the data coming from the principal market should be evaluated by the treasury function for reliability and accuracy. If principal markets are not available, GAAP further indicates that valuation should be derived from the most “advantageous” market, in which digital assets should be compared on a level I, II, or III input basis to determine an accurate comparable, such as identical digital assets in inactive markets or similar digital assets in active markets and so on.

Tax considerations

Implementing processes to manage tax basis tracking and recovery on disposition is essential to mitigate undesired tax outcomes. Further, using hedging instruments on digital assets and other methods of mitigating risk associated with price volatility may impact the taxation of the underlying digital assets. Digital asset ecosystems offer novel tools such as DeFi platforms, which may be an efficient way to earn a return on treasury assets; however, these constructs may result in undesired tax implications, making it necessary to analyze and understand how these activities may be treated for tax purposes.

Time for transformation

Adoption of digital asset utilization is a key area that will likely require new processes and controls that span and permeate all areas and terrains incorporated with the treasury. The possibilities raise newfound opportunities that can be executed incrementally, providing ample time for organizations to develop and implement a digital asset strategy.

Digital assets: Read the full report

Endnotes


1 Statista, “Digital assets – worldwide,” April 2023. 

About Blockchain & Digital Assets at Deloitte
At Deloitte, our people work globally with clients, regulators, and policymakers to understand how blockchain and digital assets are changing the face of business and government today. New ecosystems are developing blockchain-based infrastructure and solutions to create innovative business models and disrupt traditional ones. This is occurring in virtually every industry and in most jurisdictions globally. Learn more at deloitte.com/us/blockchainanddigitalassets.

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