FinTechBlockchainGoldman Sachs’ head of digital assets: Market looking for institutional grade crypto infrastructure

Goldman Sachs’ head of digital assets: Market looking for institutional grade crypto infrastructure

Accounting treatments of crypto creates an “interesting dynamic”

Crypto companies have had to “raise the bar” and make sure they are an “institutional grade” in terms of their offerings, in turn making corporates more comfortable in dealing with crypto assets, according to Mathew McDermott, global head of digital assets at Goldman Sachs.

“The infrastructure conducive to corporates in terms of holding and being able to liquidate the cryptocurrency is where the market has really progressed over the last two or three years,” he says. “We have seen huge development in digital custody, in risk management, and in trade execution, driven by the broader adoption by this cohort.”

Despite infrastructure becoming “more sophisticated”, the technology around accessing cryptoassets is “still immature”, according to Luke Sully, CEO of Ledgermatic.

“There’s still the prevalence of using quite experimental technology, especially with encryption technology to the keys. You’re seeing a lot of advancements in privacy enhancing encryption technologies. What hasn’t settled yet are the financial controls around how you access it, who accesses it and under what basis.”

“The development of technology solutions will enhance and develop to the point where it will give confidence to CFOs and treasurers that there is a level of maturity and sophistication,” says Sully.

Technology driven companies have been among the first to invest parts of their balance sheet into digital currency. In October 2020, Square invested $50m in bitcoin. Similarly, Tesla added $1.5bn worth of bitcoin to their balance sheet earlier this year. MicroStrategy made a $475m bitcoin purchase over the final quarter of 2020.

Working with cryptocurrency provides a challenge for corporate treasurers as accounting rules were “not designed with digital assets in mind or assets that are not tangible in nature,” according to Anthony Day, blockchain partner at IBM Global Business Services, UK and Ireland. “For multi-nationals, the various regulatory and reporting frameworks do differ significantly from country-to-country.”

The accountancy treatment of cryptocurrency presents an “interesting dynamic” for corporate treasurers when they think of it as an investible asset, according to Goldman Sachs’ McDermott.

“It’s currently treated as an intangible and is accounted for at cost, which basically means if the value of the asset continues to appreciate one can’t recognise that, however you do recognise impairment.”

Accounting cryptocurrency as an intangible asset can undervalue the asset and create volatility on the balance sheet, says Ledgermatic’s Sully.

“There is huge potential in the domain of cryptocurrency and digital assets for transforming the way that we transfer value and invest as organisations,” says IBM’s Day. “The efficiency and automation of programmability could transform cross-border trade, complex supply chains and intracompany settlement and reconciliation.”

“Over the next three to five years, we’ll see corporates interoperating between cash and all sorts of different digital assets and to combine those two together, using either the technology or the asset classes, to try and find ways to improve the financial health of their company,” adds Sully.

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