Corporates flock from Dollar to BTC

  • Enterprises adopting Bitcoin in their balance sheets is becoming mainstream sooner than one would imagine.
  • The perception of Bitcoin and other cryptocurrencies as a serious financial investment is changing - this emerging asset class is already offered by banks and financial institutions.
  • An increasing number of corporations are including these assets on their balance sheets.

Overview

It would take a $1.5bn investment by Tesla for Bitcoin to achieve mainstream corporate adoption. In the tweets of Elon Musk:

“Having some Bitcoin, which is simply a less dumb form of liquidity than cash, is adventurous enough for an S&P500 company.”

Since its launch in 2009, Bitcoin’s infrastructure and ecosystem have matured. With its fair share of ups and downs, Bitcoin is finally at a stage where companies are considering it not just as an investment but also as a medium of exchange. More than 2,300 businesses in the US have started to accept Bitcoin.

Bitcoin as a medium of exchange

So why are companies facilitating payments using bitcoin and other cryptocurrencies? The answer seems obvious: they get access to newer demographic groups and increase their clientele. These new groups have seemingly accepted this new asset class as a concrete part of the modern financial system.

Bitcoin’s presence enables access to new capital pools, separate from the traditional investment arenas, along with furnishing options like programmable money (smart contracts), which are not available with fiat currency.

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But as we stated earlier, unless people witness big guns practising it, widespread adoption is still unthinkable. For that, we have the ever-so-adventurous Tesla followed by Square and MicroStrategy. The good thing is that smaller and mid-sized companies are learning fast. What’s the implication? This trend may see more long-term crypto investors instead of mere short-term crypto users/traders. Balancing the funds through several asset classes opens up new doors of opportunities and enables the companies to profit from each segment of the economy. Yay!

But will Bitcoin get a starring role in investments?

Bitcoin being accepted as a formal mode of payment is one thing, but its adoption as an investment such as a bond, mutual fund or ETF, is quite another. MicroStrategy, the firm making business analytics software, has a dedicated section called “Bitcoin is hope” on their official website. In August 2020, the company made its first Bitcoin investment and the company now owns over 105,000 Bitcoins. Bitcoin investment is a part of MicroStrategy’s new capital allocation strategy, which aims to maximize long-term value for their shareholders.

Bitpay’s CMO, Bill Zielke, says that over a billion dollars of crypto transactions were facilitated in 2019. A majority of those were made in Bitcoin. But a more significant move was made by US bank, Wells Fargo, that became one of the first traditional financial institutions to offer crypto funds to its high-net-worth clientele.

Fidelity Investments Inc launched its Bitcoin custody services in 2019, which began through a subsidiary company known as Fidelity Digital Assets. This allows individuals and institutions to buy, sell, transfer and store Bitcoin in large amounts without any hassle.

JP Morgan Chase is offering clients five crypto funds. This is enabling a faster mainstream crypto adoption than anybody would have imagined.

In 2021, Morgan Stanley confirmed that they would offer their wealth management clients exposure to Bitcoin by pairing external crypto funds. Individuals can now invest up to 2.5% of their net worth in the digital asset, with a total of two crypto funds. Morgan Stanley already owns 28,200 shares of the Grayscale Bitcoin Trust along with 10.9% of MicroStrategy (MSTR), the largest corporate bitcoin holder.

Meanwhile in the US, the Securities and Exchange Commision (SEC) Chairman, Gary Gensler has given the go-ahead to ETFs that are going to trade Bitcoin futures. The SEC’s first US Bitcoin future-based mutual fund rolled out earlier this year. Other companies offering Bitcoin ETFs are Invesco Ltd., ProShares, VanEck, and Galaxy Digital to name a few.

Bitcoin: Regulations and risks

The US is one of the few nations that offers regulatory certainty thus facilitating the holding of cryptocurrencies in enterprise balance sheets. Now banks can directly get involved in Bitcoin funds. Companies are more confident holding Bitcoin because of their access to blockchain technology, holding coins on behalf of clients and running public blockchain nodes. In terms of custody and management, banks provide digital asset custody plans to enable companies to enter the digital coin market.

Yet, the volatile nature of cryptocurrencies still keeps investors at bay. Even after providing excellent returns, the Bitcoin balance sheet has its fair share of risks. Bitcoin does not sit well with a company’s corporate treasury, whose primary purpose is to provide a backup, or insurance, during slump phases and deploy funds for strategic growth and opportunities.

When a company includes Bitcoin in their balance sheet, they cannot lock in gains until they actually sell. If, on the other hand, the value of Bitcoin falls, the company must write the value of their holdings down as an impairment charge. This may put the company in a tight spot, not allowing it to enter gains but requiring them to reflect the asset loss as an expense. However, a single jump in the Bitcoin prices can reap exorbitant profits.

Bitcoin’s use for enabling easy payments

Companies like Tesla briefly permitted the use of Bitcoin to facilitate payments. As a result, this increases the flow of Bitcoin in the market and adds up to the company’s balance sheet. Then there are Bitcoin ATMs! As a mode of payment, Bitcoin can be adopted in two ways:

  1. The first way to accept Bitcoin as a medium of exchange, along with traditional modes of payment, is by using a custodian (or a third party vendor) who is certified to maintain the cryptocurrency on a blockchain. A custodian is also eligible to provide wallet services, thus facilitating the valuation and tracking of digital assets to customers and companies alike.
  2. The second way is to integrate Bitcoin in your company’s system and manage it through its own private keys. A key is like a code, which locks the data and makes your information secure.

You may choose to take a hands-off approach by converting the Bitcoin into fiat money and accepting that as a mode of payment. In this method, you convert the cryptocurrency into fiat money without having to touch the actual digital currency directly.

Enabling payments through Bitcoin, with conversion, is one of the fastest ways to enter the digital asset market without having to take on the risks associated with them. It consists of a third-party vendor, also known as an agent, who makes payments or accepts payments in crypto by converting it to fiat currency or vice versa. The agent charges a fee for this process and manages compliance.

However, this does not mitigate risk in any form. Corporations may want to pay heed to problems related to anti-money laundering and pay close attention to the Know Your Customer (KYC) formalities.

The UN’s stance on Bitcoin and cryptocurrencies

A comprehensive report by the United Nations on the effect of cryptocurrencies on the environment stated that:

“Bitcoin mining can be said to be partly responsible for the production of the greenhouse gases that cause climate change (although, so far, the impact on the climate is far less than that of heavy hitters such as the agriculture, construction, energy, and transport sectors).”

However, in the same report, the UN outlines the transparency of transactions that Bitcoin's blockchain technology brings when it comes to allocating funds for important causes. Its largest agency, the World Food Programme (WFP), found that blockchain technology ensured that cash got to those who needed it the most. WFP got cash directly to beneficiaries in a pilot programme in Pakistan, without the need of a local bank. The project was called Building Blocks and has also been successful in Jordan’s refugee camps where it helped WFP create a reliable online record of transactions.

Another report by the UN environment agency, UNEP, suggested that the technology could improve the livelihoods of waste pickers, who make a living in the informal economy. The report pointed out that a transparent monitoring system could track the whereabouts of waste and see how it was used, apart from identifying the people who picked it. This would ensure that waste-pickers get rewarded appropriately.

Conclusion
The cryptocurrency market is worth around $2tn and Bitcoin alone is worth around $1tn. Bitcoin can be seen as the evolution of finance. With soaring prices and countries gradually lifting bans on Bitcoin, cryptocurrencies are not viewed as a ‘vague venom’ anymore. Corporations that want to keep up with cutting edge technology such as distributed finance (DeFi) - also dubbed the future of finance - should get comfortable with cryptocurrencies sooner rather than later.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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