By Jason Blick, CEO of EQIBank
The March 2020 equities sell-off personified the fear and angst held in investors' mindset about the impact COVID-19 would have on our economies and society. Lockdowns, accompanied by economic and societal restrictions, made this fear all the more real. It impacted almost everyone that had a stake in the financial world, no matter how big or small. What surprised most followers of the financial markets was the speed at which the risk-off behavior was replaced by a bull market that found legs in the booming stay-at-home economy.
Big tech quickly found momentum in the sudden surge of the online and digital economy. Big industry and blue chip stocks also found solace in the unprecedented scale of the monetary stimulus measures that were pumped into the system by central banks across the world. The rapid innovation across the global investment landscape made clear that the financial markets were soon to be braced for rapid change driven by a new found retail investor base. It is becoming clearer that these changes, personified by the Robinhood retail investor army of the Summer of 2020, are also being accompanied by a portfolio diversification among institutional investors, not least corporate treasury managers.
The main drivers of corporate Bitcoin acceptance
Corporate treasury managers are perhaps the least talked about institutional investor group in crypto circles. But that has been slowly changing with the onset of Elon Musk and Tesla’s well documented Bitcoin treasury holdings. Tesla aside, the investment needs and demands of corporate treasury managers are often more diverse, encompassing varying degrees of risk tolerance, than is often perceived by the media. Much has been learned about the mechanics and functioning of the crypto and capital markets since the COVID-19 pandemic swept across the globe. But what isn’t quite as understood is why corporate treasurers are paying closer attention to crypto.
The publicly-listed trio of corporate Bitcoin adoption — Microstrategy, Square, and Tesla — are often cited as the catalysts that have ignited the corporate treasury corporate drive. While the trio’s contribution is significant to the development, there are many other factors increasingly turning the attention of corporations of all sizes, public and private, to strongly consider Bitcoin that make it an attractive store of value and reserve hedge.
Greater transactions spur allocation strategy
There is evidence of a strong correlation between Bitcoin corporate acceptance for payments, and cryptocurrencies finding their way onto corporate balance sheets. As a report by Deloitte noted, “an increasing number of companies worldwide are using bitcoin and other digital assets for a host of operational and transactional purposes.”
If cryptocurrencies are increasingly being used for corporate transactions, the need for corporate treasury managers to hold part of their reserves in the asset class becomes ever more compelling. This is largely down to allocation strategy: the more you transact and interact with a particular asset, the more benefit there is to allocating more resources into that particular asset class.
Deloitte's report on corporate bitcoin acceptance highlights the link between bitcoin at a corporate operations level and for allocation purposes: “The first question to ask when considering using crypto in your company’s operations is: Do we hold crypto on our balance sheet or simply adopt crypto-enabled payments?” Therefore, with PayPal, Revolut, among other payment platforms increasingly offering Bitcoin and crypto for corporate services, the industry needs to respond to the ever growing needs of crypto corporate treasury managers. Integrated banking as a service (BaaS) solutions with cryptocurrencies will be an important solution for this growing trend.
Bitcoin’s universality leads to jurisdictional advantages
Bond markets - the traditional asset class for corporate treasury managers - are decoupling from one another based on regional. Soaring U.S. inflation that is lacking elsewhere in other jurisdictions, will have a knock-on impact on bond market performance elsewhere. Higher inflation will lead to high interest payments on bonds, meaning current holders of low coupon bonds will race for the exits. Although the reports of bond market jitters are somewhat well documented, there lacks an understanding of how this will impact alternative asset classes like cryptocurrencies.
For corporate treasury managers coming up against a conundrum in the bond markets, Bitcoin’s universality and jurisdictional neutral fundamentals provides a compelling reason as an alternative reserve asset class. While rules and specific laws pertain to cryptocurrencies in different countries, fundamentally Bitcoin is regionally neutral. It is removed from regional monetary and economic policies that direct other asset classes and markets, such as bonds. These fundamentals of Bitcoin should therefore allow corporate treasury managers to navigate the traditional financial markets during periods of distress or market uncertainty.
Access and flexibility
The bond market is very expensive to enter for most small-to-medium sized corporate treasury managers. The requirement to pay investment bank, legal, and operational fees to bond market counterparties makes access a hindrance to many smaller companies. The need to go through custody providers and banks to allocate cash reserves can even be a hindrance for many companies in the hard to bank industries, such as America’s state compliant cannabis businesses, or even in our very own digital asset space.
Companies in the hard to bank industries, such as state compliant cannabis businesses are facing an added layer of hurdles and administrative burdens in order to access capital and traditional bank services. These hurdles shut out many independently owned businesses across the hard to bank sectors from acquiring loans, or setting up deposit accounts. In addition, these restrictions preclude such companies from running payroll or paying taxes. These negative consequences of all this preclude many emergent sectors from the resources they need to effectively manage their revenue streams and corporate reserves.
Bitcoin and cryptocurrencies, together with compliant digital banking solutions, can resolve this dilemma for so many companies in the hard to bank industries by providing access to tailored global services. Bitcoin’s decentralized foundations ensure that holders do not necessarily need to go through all the hoops associated with traditional centralized financial services. A corporate cryptocurrency account holder has more options available to them for the custody, storage, and administration of their funds than in conventional financial institutions. This can provide the flexibility and access that these companies so badly need when it comes to their corporate reserves.
Crypto will speak to a more diverse corporate sector
The ever evolving investment needs of corporations, coupled with a rapidly transforming market and regulatory backdrop is marking a significant shift in the investment needs of corporate treasurers. With these changes in the air the days of purely conservative treasury management in bonds and cash deposits looks set to be challenged. The changing business and financial landscape serves a growing need to diversify into alternative assets, none more so than Bitcoin and cryptocurrencies.
Cryptocurrencies speak to a more diverse corporate sector that are increasingly familiar with emerging technologies. But importantly, cryptocurrencies are becoming a more viable investment for corporate treasury managers because they offer a universal access point to invest. What’s more is that the uptick in Bitcoin corporate transactions is spurring institutional investor adoption. MicroStrategy, Square, Tesla, and others have found a new voice for corporate investment in digital assets, and corporate treasury managers that are at the forefront of the new digital economy will accelerate that process. The crypto and banking worlds just need to be ready to service these new found needs.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.