In the world view of Microstrategy CEO Michael Saylor, there’s no scenario in which the dollar retains its global reserve status...
Let’s face it the U.S. dollar has been devaluing since the Fed took over in 1913 but now equally more so thanks to mass quantitative easing brought on by Covid 19. Bond yields are almost non-existent; and gold is sadly underperforming. Liquidity-flush firms have fewer places to put their cash — so pressured investors are now turning to cryptocurrency as a consequence. However, expectations were that firms would take out smaller positions as a hedge. No one saw Microstrategy’s move to front-run BTC shepherding over $1 billion of MicroStrategy’s reserve dollars into bitcoin or his claim of an imminent USD debasement apocalypse as a game changer.
“There’s a macroeconomic wind blowing – big – it’s gonna impact $400 trillion of capital. That capital is sitting in fiat instruments that are being debased. That capital is going to want to convert into strong money,” Michael Saylor, CEO Microstrategy.
Saylor pinpoints the crux of the issue facing many corporate treasurers today—how do you recapitalise in the face of diminishing yield on capital reserves? Enter Bitcoin, with its growing recognition that the strictly limited supply gives it a good chance at maintaining its value well into the future. Supply and Demand 101. Plus Bitcoin comes without the downside of existing options today e.g. lack of convenience, low liquidity, and elastic inflation.
It didn’t take long for other corporates to follow, with asset manager Stone Ridge Holdings purchasing USD$114 million’s worth of BTC and mobile payments giant Square investing in USD$50 million’s worth of BTC. Now bucking the trend is Tesla with it’s USD$1.5 billion investment and possibly Twitter’s CFO stating they may look to add BTC to their balance sheet.
The entry of these firms has provided a definite “confidence for the rest to follow.” But what’s the playbook here? We look at four things treasurers need to bear in mind when balancing the opportunities and risks in crypto: where and how do you buy it, how do you secure and store it, how can you use it and finally how to invest in it.
Gateway: Where do you go to buy cryptoassets?
Institutions mainly want their digital asset investments to look and feel like other more traditional investments in their portfolio with everything from service providers to reporting. Ease of access and options that meet diligence and compliance standards are also critical. A treasurer’s first port of call when contemplating entering crypto markets therefore is to tap into the right cryptocurrency on-ramp such as an exchange or OTC desk for larger purchases where they can offer fiat in return for crypto. In 2017, getting funds into crypto called for routing them via unknown banks at a high cost. Users were often waiting days for a transaction to clear. In 2020, we’re tracking a very different scene that’s ushered in built-in fiat gateways across exchanges and more OTC desks propping up, with new fiat currency options being added weekly. More crypto friendly banks are surfacing as well and customer service supporting on-ramps has seen significant improvements since the early teething days of 2017.
Safeguarding: How do you store, manage and access cryptoassets?
Holding Bitcoin can be hard if you don’t have the right security, wallet infrastructure and custodian in hand. Headline-grabbing stories about the hacking of cryptocurrency exchanges and wallets, millions of bitcoin and other altcoins suddenly ‘vanishing’ from investor accounts or accounts being completely lost, stolen or coerced from investors cannot be ignored or denied.
Cryptoassets aren’t stored literally. Instead, what is stored and secured are the private keys linked to those assets as they are needed to access the public blockchain address of the cryptoasset to set transactions in motion. As a company putting a significant amount of your Treasury in Bitcoin, you have a fiduciary responsibility to ensure that those funds are secured properly. Without a third-party independent custodian to support safekeeping and administering those keys, corporate treasurers enter crypto markets completely unguarded, unregulated and unprotected. Moreover, they lack the essential amenities provided by custodians, including insurance, multisignature accounts and allow and deny lists.
This is one of the critical roles custodians can play-adding integral elements of control that support mitigating holding and fiduciary risk or the misappropriation of funds. But at a foundational level, custodians provide the security and insurance needed to give treasurers peace of mind.
Administering cryptoassets: from payments to finding more upside potential
Mainstream adoption of cryptocurrencies has traditionally been hindered by their limited utility as an instrument of exchange due to volatility, cost and speed to transact. However, the entrance of advanced technology platforms to the scene now offers the possibility of mainstreaming digital currencies. Entrants like Paypal who signalled their plans late 2020 to significantly increase cryptocurrency's utility by making it available as a funding source for purchases at its 26 million merchants worldwide is a game-changer.
Corporates have already begun exploring alternate uses to crypto beyond just a reserve currency. From employee incentive schemes and payroll to building more transparent supply chains with crypto cross border payments. In fact, global decentralised blockchain Ethereum with its ether token and smart contract functionality envisages the ‘the 10-second cross-border crypto-payment’ as it has the promise to offer a solution that’s real-time and cost-effective. In the traditional rails of finance, the payments process relied on a payments provider but with crypto essentially a custodian can now function as the payments processor.
Besides the potential for crypto to function as a cross-border payments rail, treasurers can look to decentralised finance applications (DeFi DApps) as a means to tap capital markets to generate more yield or returns. Popular decentralized protocols like MakerDAO, Compound, Aave and Synthetix are growing user adoption with their ability to facilitate peer-to-peer capital markets. These DApps clearly have their upsides such as offering easier access to crypto financing solutions like borrowing, lending and trading of cryptoassets. But the lack of institutional features such as Know Your Customer (KYC), Anti-money Laundering (AML) and high network fees remain an issue.
By providing corporate treasurers with the necessary layers of utility and security along with effective private-key storage, custodians like Trustology who are DeFi enabled via their integrations (eg MetaMask and WalletConnect), flexible rules engine, built in AML controls and automation services can enable treasurers with a safer route to access DeFi and digital assets overall.
Prior to developing TrustVault, Trustology researched existing market-leading solutions like hardware wallets and cold storage, and determined that there was an un-addressed need for a low-latency, user friendly, yet highly secure custodial wallet provider. As one of the first in the crypto space to offer a truly insured (Marsh) hot wallet tested for resiliency, performance and security we offer a service that is always available in real-time with robust automated account recovery measures in place. All private keys and controls are managed within tamper proof, top-of-line programmable HSMs, and then stored in secure data centres with highly-available multiple encrypted backups. The bespoke Trustology firmware within the HSMs allows for all transactions to be re-signed and verified within their HSM and secure data centre infrastructure with no human intervention. This allows for securing and managing private keys via segregated accounts at scale no matter the size of a business or number of individual users, whilst reducing operator risk.
We’re at the beginning of what we hope will play out as a long term trend for corporates, with more companies moving to include cryptoassets as part of their investment portfolio. However, it’s important that treasurers fully understand the risks and who to partner with to ensure the best way to access, purchase and store these assets. Custodians can be a good starting point to leverage.
Learn more about our custodial wallet solution, explore our services.