By Christopher May, Co-Founder and Co-CEO of Finoa
Inflation in the U.S. is the highest it’s been in decades, and the rest of the world is pensively watching how this will affect inflation globally. As the ripples begin to spread, some are projecting that inflation will remain above target rates through 2023. Corporate treasuries are already reassessing their investment portfolio allocations to ensure the retention of the value of their holdings over the long term, turning to digital assets such as cryptocurrencies as a hedge against inflation.
However, because corporate treasuries are also responsible for managing the funds to support a company’s day-to-day operations, it’s important for them to understand the full range of opportunities presented by digital assets. There are three primary use cases for digital assets in corporations, addressing both daily and long-term needs of the organizations, and the type of digital asset to consider will vary depending on the use case.
Investment use cases
For corporate treasuries, investing part of their fiat balance in digital assets helps to diversify the risk of inflation and to protect the overall value over the long term, as mentioned above. In addition, some companies have invested in cryptocurrencies for speculative purposes, in order to attain profits, but this is rare. MicroStrategy, for example, invested substantial amounts into Bitcoin both for diversification and for speculation reasons.
For diversification purposes, it’s better to hold tokens that are not pegged to fiat currencies, so stablecoins, such as Tether, USD Coin and Binance USD, do not make sense. Instead, corporate treasuries looking at digital assets for currency diversification purposes will likely be investing in more mature cryptocurrencies, such as Bitcoin or Ethereum.
Corporate treasuries that are new to digital assets should only invest small amounts in the beginning, until they feel more comfortable with the concept. Keeping in mind that for most companies the primary objective of the treasury is to support the business growth, it is fair to say that a maximum of 5% of a corporate treasury should be invested in digital assets. Crypto should be considered a long-term investment option, due to the fact that there is still high volatility, which can potentially impact the short-term performance of the assets.
Payment use cases
Digital assets are moving into the mainstream, and many companies have realized that people who hold a significant amount of these tokens want somewhere to spend them. Thus, there is a trend towards businesses accepting payments in cryptocurrencies. For example, Tesla allowed customers to pay in Bitcoin for a short time, while brands like AMC Theaters, Microsoft and Twitch are letting customers pay in crypto. In countries that have recognized cryptocurrencies as legal tender, such as El Salvador and Japan, people can use crypto in many fast-food chains, and in Switzerland, citizens of the town of Zug can use Bitcoin to pay their utility bills.
Corporate treasuries are also finding that digital assets have advantages when it comes to shifting value across borders, because payments on the blockchain are cheaper and faster, requiring only a couple of minutes for settlement. Visa, for example, moves money between countries by sending stablecoins. Businesses can use crypto for external payments, such as paying suppliers or the government, as well as for cross-border payments. Companies are even using crypto for internal payments and transactions with partners and subsidiaries in different countries. Trailblazers like Purse.io and Fairlay are even paying employee salaries in crypto.
For payment use cases, corporate treasuries will more likely be investing in stablecoins so that they don’t face much volatility. However, depending on a company’s business model, some may also accept and use NFTs. For instance, a private bank can choose to accept an NFT painting as collateral for a loan if a customer who stores a significant amount of their wealth in NFT artworks decides to buy a house.
Blockchain ecosystem participation use cases
Some corporations will buy and hold digital assets in order to participate in the blockchain ecosystem and can use the tokens as a native currency in these networks. Daily transactions on the blockchain could include vetting potential employee credentials or using smart containers for the logistics industry.
In the healthcare industry, medical institutions can securely access and transfer patient data via the blockchain, so the treasuries of these institutions could hold digital assets to pay for these transactions. Insurance companies can execute smart contracts over a blockchain to speed up the claims process and send payments more quickly to clients.
For these use cases, companies would hold tokens for the specific network they are interacting with. If a company utilizes more than one blockchain for its business transactions, it will need to hold investments in the native currency for each, requiring them to actively manage these as part of their treasury.
The competitive edge
The decision to accept cryptocurrency for payments is not something that a company can try out for a few months and then cease doing. Considering the complexity of setting up a completely new payment system, a business needs to commit to digital assets for a long-term. Processes will need to be established for issues such as accounting for a payment made by Airdrop that cannot be returned to the sender. That said, corporations can turn to service providers who can take out the complexity by managing the tech that runs in the background.
Ultimately, digital assets are not going away, and their use has been mainstreamed as corporations like Starbucks, PayPal, Nordstrom and Whole Foods Market embrace them. Companies must educate themselves. Buying and holding digital assets is a good way for corporate treasuries to not only build up their company portfolios, but it’s also a good way to become familiar with these assets.
Companies need to move with the times and recognize that digital assets offer multiple benefits both for long-term investments and for the day-to-day activities of businesses. Forward-thinking corporate treasuries that have started educating themselves about the ecosystem will garner a competitive edge for their companies down the road.
About the author:
Christopher May is the Co-Founder and Co-CEO of Finoa, a leading European digital asset custody and financial services platform for institutional investors and corporations. Prior to founding Finoa, Chris was with McKinsey & Company, serving banks and insurance companies on strategy, corporate finance and digital transformation, and previously at BHF-BANK in their asset management department. He earned a degree in Business Administration from WHU – Otto Beisheim School of Management (Vallendar, Germany) and University of Southern California (Los Angeles, USA) and received his MBA from IE Business School (Madrid, Spain). Chris is a guest lecturer at the Kellogg School of Management as well as at the Wolfgang Goethe University in Frankfurt/Main.