Bitcoin’s Applicability to Corporate Treasury
There is a question of how relevant bitcoin is for corporate treasury. If the Association for Financial Professionals’ (AFP) most recent annual conference is any indication, corporate treasurers are very interested in the subject. But does interest equate to adoption? Or more importantly, should it?
During a standing room-only session, payment systems consultancy BetterBuyDesign’s chief executive (CEO), Steve Mott, discussed the pros and cons of bitcoin as it relates to corporate treasurers. He noted that before long, corporates will likely find that one of their customers is going to express interest in paying it bitcoin. “They need to, one, be able to figure out, if this is a good idea for that customer, and two, how they would support it,” Mott told gtnews. “Would they add any value to the process?”
Banks also are paying more and more attention to bitcoin; Mott noted that about half the attendees at his session were banks. “They’re saying, is this something we should participate in? Should we be a part of this ecosystem? Should we bring something like risk management to the table? And the answer is, you’re going to have to eventually. You can’t ignore it,” he said.
Risks and Regulation
Mott recommends that corporates and banks get involved, get in front of this and work with the regulatory agencies, which are all eyeing bitcoin closely. Regulators around the world, whether they are positive or negative about bitcoin, see the virtual currency as having the potential to change the systems that are currently in place. Most are trying to determine whether regulating virtual currencies would suppress the power of their innovation too early.
But regulators are also wary of not moving fast enough given the risks – money laundering, fraud, etc. “They’re going to have to move a lot quicker because it’s all electronic. It’s all digital. It happens very fast. The value of the money can be gone in seconds,” Mott said.
Of course the greatest risk surrounding bitcoin – at least from an investor standpoint – is its extreme volatility. As seen in the past two weeks, bitcoin prices on the troubled exchange Mt. Gox have fallen from over US$800 to lower than US$100. It then bounced back up to about US$300, following rumours that Mt. Gox has begun restarting some withdrawals.
“It may offer opportunities for hedging and doing other kinds of things that corporate financial officers could well take advantage of. But you have to be able to deal with the huge swings in volatility,” Mott said. “The volatility going up and down by 80 percent of the value four, five or six times a year is certainly going to scare all but the people that really do understand how to manage risk.”
No Place in Corporate Bank Accounts?
Michael Jackson, a partner of Mangrove Capital Partners, told gtnews that even though bitcoin advocates would have the public believe that the bitcoin economy may exceed the value of the British pound (GBP) within a decade, it is not something corporate treasurers should concern themselves with currently.
“As a corporate treasurer, should you care about bitcoin? The short answer is no,” he said. “I am a great believer and proponent in the bitcoin economy, but there’s a time and a place for everything. And the place for a virtual currency is in the virtual world of the internet, not in a corporate bank account.”
According to Jackson, bitcoin and its contemporaries should be treated as any other asset or currency. “In general, corporate treasury holds funds to mitigate currency fluctuations – by balancing holdings in one currency to offset difference between purchasing and sales,” he said.
“If you are trading digital assets, and if you are both buying and selling these assets using a virtual currency, it naturally makes sense to hold a balance in that currency, just as it makes sense to hold yen if you have customers and suppliers in Japan. The holding will give you a hedge against the fluctuations that certainly will occur. But for the vast majority, if not to say all, corporate treasurers, there is no need or purpose in holding bitcoins at all.”