Cryptocurrencies: Considerations for Treasuries

5 Cryptocurrencies: Considerations for Treasuries Crypto, entirely new to most organizations, introduces a unique set of risks specific to cryptocurrency and its other underlying technologies that need to be assessed and managed. While the following section aims to highlight some of the key risks associated with accepting and managing crypto, we recommend treasurers assess their entire ecosystem. For this section on risks, we assume crypto is neither the reporting nor the functional currency of an organization. Price volatility When accepting crypto, an organization is likely to want to fix the price back into their functional currency. As a result, the price flexes in crypto, rather than in the fiat currency. While this provides the organization a tool to manage price risk, the real price risk sits with the crypto remitter, which is typically an organization’s client or customer. This approach assumes that crypto holders are not price sensitive, which may be the case. While few organizations offer crypto products today, price sensitivity could introduce competitive challenges if more come online. There is also the additional challenge of choosing which cryptocurrency to price flex into, as there are thousands. Due diligence into which currencies are suitable for the organization and then limiting the number accepted is a prudent approach. Price volatility is a more significant challenge if a crypto- currency is going to be held for a significant period. Not only because of the punitive valuation methods currently used to value crypto on a balance sheet, but also because crypto has a history of significant price moves over time. Due to these risks, impairment of cryptocurrency positions is a real consideration and a mitigation method against this is to limit concentration. Counterparty risk Once a remitter has made payment and before those funds have been passed by an exchange or collection agent (or both) to the receiving organization, there is a window of settlement risk. Settlement risk is the risk that the agent collecting, or other participants in the flow, on behalf of the organization goes insolvent while holding the funds, and thereby is unable to complete settlement. In the event the entity who goes insolvent is unregulated, there is also no guarantee that the agent follows client money rules resulting in the owner of the funds being treated as an unsecured creditor. This is critical in scenarios where the organization does not have access to their private keys and is holding crypto or accepting fiat from an or agent, exchange or both. This risk has had a light shined on it during the pandemic with some of the recent events around payment intermediaries. Thorough assessment of the counter parties is critical to ensure these risks are clearly understood and the extent of counterparties in the flow is known. Managing Crypto Risk Cryptocurrencies – Risks for Treasuries • Price Volatility • Counterparty Risk • AML/Source of Funds Risk • Concentration Risk • Operational/InfoSec Risk • Hedging Price Risks Example of Counterparties that pose settlement risk Remitter Collecting Agent Exchange Exchange‘s Bank Collecting Agents Bank Organization