Cryptocurrencies: Considerations for Treasuries

2 Cryptocurrencies: Considerations for Treasuries Before considering how to account for crypto or manage its risks, we need to outline the separate models for accepting these assets. There are two main approaches an organization might adopt to accept cryptocurrency as a form of payment. These approaches are significant for organizations viewing cryptocurrencies as both investments and means of exchange. The value of a cryptocurrency is essentially held in its private key. These keys are typically an alphanumeric code that grants the owner access to their crypto. If the private key is lost, the crypto is lost and anyone with access to the private key can claim the crypto asset. So securing private keys is critically important. This unique feature presents challenges for companies that accept crypto, as they must have systems in place to ensure that they have received a crypto payment and then are able to maintain and protect the private key of that crypto asset. Picture this like physical keys to a vault – if you lose your keys, you would be worried a bad actor can access the assets you store in your vault. Corporations looking to receive crypto have two options to accept these digital assets — use an agent or manage their crypto directly. Before choosing which approach to take, they should first assess which model suits their client base and risk appetite. Both models have a number of pros and cons and provide corporate treasuries with several considerations for integrating crypto into their existing receivables processes. The Agent Model Under this approach, the organization that wishes to receive crypto payments finds a third-party agent to collect and hold their crypto. This is much like an escrow account today where a trusted third-party holds deposits on your behalf. Once a client or customer pays the company using crypto, the agent then collects the cryptocurrency, holding the private key on behalf of the organization. From here, the organization can either keep crypto with the third party or request that it be converted to USD or another fiat currency – then transfering the funds to a bank account. They can keep the crypto position in the hands of the agent, or alternatively, they can request that the agent convert the crypto to USD or another fiat currency and then transfer the funds to a preferred bank account. This second approach may be preferred, as the organization never has to hold the crypto and will be able to access their funds via the bank account. There are several advantages to utilizing a third-party agent. First, this approach is currently the simplest since there is no integration of flows with the company and the agent is doing the hard work of securing the crypto and transferring it into fiat. The treasury is able to receive the funds in fiat, which minimizes accounting considerations. Most importantly, the management of the private keys is handled by the agent, so the company does not need to build any new systems to support private key security. The agency model does have its downside. Price discovery can be a challenge due to the volatility between crypto and fiat currencies, and conversion costs can often be expensive. If crypto is maintained at the agent and not converted to fiat, this extends the settlement period and therefore compounds the counterparty risk. Crypto as a Form of Payment “As a function of transacting business with digital assets, corporations will wind up having allocations of crypto in their treasury. Corporates come to Coinbase’s Institutional platform to leverage our infrastructure, rather than attempt to implement their own native crypto capabilities.” Brett Tejpaul Head of Sales, Trading, Custody and Prime Services — Coinbase