Bitcoin continues to draw widespread media attention, and seems to be attracting greater numbers of governmental and corporate supporters. British Chancellor of the Exchequer, George Osborne stated his desire over the summer for the UK to become a “global center of innovation for financial technology”1, while the Chinese government is reconsidering its stance on the currency2. On the business side, Microsoft recently added its name3 to the growing list of organizations that accept bitcoin as a payment method4. Although these companies range in size from neighborhood pizza stores and alpaca farms to multi-billion dollar retail giants, one factor that likely joins them is that the decision to accept the cryptocurrency wasn’t treasury’s idea.
If you’re wondering why, consider:
- Price risk – because there are no derivatives markets to support bitcoins, corporations accepting bitcoins will experience price volatility on a daily basis with no means to protect against extreme losses in value of their holdings.
- Liquidity risk – due to the lack of market infrastructure supporting the bitcoin, trading tends to be of relatively smaller quantities than corporates would need to transact on a daily basis. As a result, exchanging large amounts of bitcoins may incur large bid/ask spreads, meaning a loss of value and/or the need to spread out transactions over periods of time, incurring more costs and increasing price exposure.
- Counterparty risk – payment systems using Bitcoin are not regulated nor do they provide any guarantees. If a $100M payment “doesn’t go through” then what is the recourse and to whom? Even if the result is positive, treasurers need payments to go through immediately and be certain of their outcome
Given treasury’s remit to protect the organization’s cash holdings, any one of these could be cause for concern. Combining all three would certainly give even the most adventurous of treasurers heartburn.
So, assuming that you have lost that battle and your company does decide to start accepting Bitcoin, what can treasury do to ensure that your exposure is kept to a minimum? Here are a few tips:
- Minimize your holdings – be effective with your cash (bitcoin) management and only hold the quantity of bitcoins needed to meet forecasted bitcoin obligations. Holding anything more exposes treasury to unnecessary price risk (we would say FX risk, but perhaps the better term is “VX” Virtual Exchange risk).
- Back it up – If you use an online wallet, make sure that you back it up (ideally in , encrypt it and store the password carefully. IT can’t help you get your password back, so if you lose it, it’s gone. If you use offline (“cold”)storage such as a USB stick, again, back it up and treat it like it’s your own wallet full of greenbacks
- Don’t put all your eggs in a single basket – Given the lack of central bank backing and protection against counterparty risk, should anything go wrong with your bitcoin wallet / payments / exchange provider, you may well be left with nothing. If you have large bitcoin transfers to make, consider spreading the risk by using multiple counterparties.
- Stay abreast of regulations and speak with your auditors – Given how new bitcoin is in the corporate world, the regulatory landscape continues to evolve. In the U.S., bitcoins have been designated a commodity so any price increase/decrease while you hold bitcoins generates capital gains and losses. Other markets have their own unique nuances, so stay informed.
- Establish (very) strong audit and controls – one of bitcoin’s inherent benefits / challenges is itsconsiderable level of anonymity, as well as its lack of audit trail (for example, payments made with bitcoin are irreversible). To counter this, you need to ensure that your organization’s internal processes and audit trails are even better than for regular payments.
While bitcoin remains volatile (and as such, we continue to recommend treasurers handling it with extreme caution), its increasing acceptance in the corporate world will only help overcome these pains of early adoption. It is inevitable that bitcoin and other virtual currencies continue to evolve and develop into a legitimate financial tool. Until then, stay safe and remain cautious in all your bitcoin dealings.
1. Chinese Government Official Believes Bitcoin Can Coexist With Government Money – Cryptocoin News, December 14, 2014
2. UK to Explore Bitcoin Role – BBC News, August 6, 2014
3. Microsoft: Bitcoin Accepted Here – eWeek, December 14, 2014
4. Who accepts Bitcoins as Payment? – BitcoinValues.net