There has been an influx of large, recognizable enterprises adding bitcoin to their corporate balance sheets. MicroStrategy, Square, and Tesla have all purchased bitcoin for treasury management initiatives. While bitcoin’s allure as a store of value, due to its climbing price and decentralized nature, is convincing, we are perplexed by the attraction from traditional risk-averse treasury management financiers.
The pandemic and its effects have prompted institutions to reconsider their investment and risk management policies. There are many compelling reasons for institutions to embrace digital assets, such as corporate initiatives to adopt modern technology and hedging against inflation during unprecedented times. Nonetheless, the recent interest seems to be on bitcoin specifically, rather than blockchain technology or any of the other thousands of digital assets available. Bitcoin is a historically volatile and speculative investment, which directly conflicts with treasury management objectives.
A treasury department’s primary functions are risk management and preservation of capital.
There are many factors to consider when establishing best practices to manage risk and enhance returns; including short and long-term liquidity needs, changes in interest rates, the macro environment, and various others. With the weakening value of the US dollar, treasurers have started to look outside their normal strategies. Extraordinary situations call for extraordinary responses.
Why are corporate treasury departments turning towards Digital Assets?
1. Simple transferability to enhance internal operations and performance
2. Blockchain’s faster, cheaper, and safer technology solution
3. Potential higher yields
It is understandable that treasurers are looking towards alternative solutions, especially with the enticements above. However, the digital assets market is much greater than just bitcoin. Corporate treasurers should familiarize themselves with less volatile financial products, such as digital securities. Digital securities are regulated financial instruments that represent an underlying asset, such as stocks, bonds, and funds with the added benefits of blockchain technology enabling peer-to-peer transfers, instant settlement, and lower transaction costs.
When looking for safer and more secure financial structures during the business assessment and investment due diligence process, one must weigh a variety of components. Registered financial products can be more attractive than their unregistered counterparts, as many include additive protections, such as mandatory AML/KYC compliance and the use of independent identity attestation parties. One potentially ideal digital security for corporate treasurers is one that is overseen by a regulatory body that requires independent auditing, custody of assets in a trust, and transparent financial reporting.
It’s safe to say that taking a step-by-step, composed approach toward business digitization can be expected to align best with treasurer's risk appetite. Treasurers are concerned with the implementation of a digital asset and have to amend existing workflows and backend technologies to account for its intricacies. For example, holding digital assets requires the use of digital wallets, specialized liquidity providers, and different pricing feeds, compared to traditional financial asset classes. Starting with an easily digestible digital asset, like a low volatility token, can help ease the transitional burden of accounting, operational, and reporting configuration challenges, while minimizing monetary apprehension.
An opportune first step to addressing a treasurer’s workflow and safe-keeping responsibilities is a familiar financial structure. This approach can help remove some of the initial internal approvals and reluctance burden and treasurers can begin to adapt modern technology into their existing operations. One existing opportunity in the digital assets market for treasurers could be the Arca U.S. Treasury Fund, a closed-end, ‘40 Act fund that invests in a portfolio consisting primarily of U.S. Treasuries, that issues its shares as a digital security, ArCoin. The Fund utilizes an existing regulatory structure while leveraging blockchain technology to shorten settlement timelines, enable 24/7/365 peer-peer transferability, and remove intermediaries.
Corporations want to exploit blockchain technology and digital assets to maximize their bottom line, but the adoption process is undoubtedly long and arduous. Fortunately, there is an assortment of digital assets designed to meet a variety of investors’ needs. The digital asset industry is just ramping up, so the time to start evaluating the most appropriate means of investing is now. Finding the right digital asset, for the right purpose, at the right time is imperative.
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