Rush to bitcoin? Not so fast, say keepers of corporate coffers

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LONDON / NEW YORK (Reuters) – When Elon Musk’s Tesla became the biggest name, revealing it added Bitcoin to its coffers last month, many pundits quickly called out a corporate run on the booming cryptocurrency.

FILE PHOTO: A virtual currency representation of the Bitcoin and US dollar banknotes can be seen in this illustration on January 8, 2021 in front of a stock graph. REUTERS / Dado Ruvic / File Photo

However, it is unlikely to see a concerted crypto fee anytime soon, say many finance managers and accountants who refuse to risk balance sheets and the reputation of a highly volatile and unpredictable asset that messes up the convention.

“When I was taking my treasury exams, our primary goal was to keep our balance sheet safe and liquid,” said Graham Robinson, international tax and treasury partner at PwC and advisor to the UK Association for Corporate Treasurers.

“That’s the fundamental problem with Bitcoin. If these are the goals for treasurers, breaking them could get them into trouble.”

With the $ 1.5 billion bitcoin bet from Tesla Inc, the company, together with SoftStrategy Inc and Twitter boss Jack Dorsey’s payment company Square Inc, swapped some traditional cash reserves for the digital coin.

Proponents of the cryptocurrency see it as a hedge against inflation at a time of unprecedented government stimulus, a falling dollar, and record-low interest rates that make it difficult to find attractive high-yielding assets.

While the move has sparked further discussion in the boardroom, the headache of Bitcoin’s volatility in the accounting and storage of Bitcoin is likely to rule out a large wave of companies holding large amounts on their balance sheets in the short term, according to Reuters surveyed Members and accountants.

“It will take more than a small handful of disruptive companies investing in Bitcoin to sway the narrative in boardrooms,” said Raul Fernandez, an entrepreneur and investor who sits on the board of directors of chipmaker Broadcom Inc. and others.

“Bigger global companies, I can’t see these conversations right now.”

Graphic: Betting on Bitcoin:

BITCOIN’S INTANGIBLE TANGLE

One problem could be in the heck of the accounting details in an accounting industry that, like many others, is still taking stock of the nature of cryptocurrencies.

The Financial Accounting Standards Board, which sets accounting standards for US companies, does not have specific guidelines for accounting for cryptocurrencies. However, in line with discussions between a separate US trade organization, companies are applying existing FASB guidelines for accounting for “intangible assets,” which typically include intellectual property, brand awareness, or goodwill.

According to these rules, companies other than investment firms or broker-dealers cannot post increases in the value of investments if the price of Bitcoin rises. However, you must write off your asset as an impairment loss if it falls.

In addition, once a company has written off its holdings, it cannot post subsequent profits until it sells.

In contrast, companies regularly reflect the effects of fluctuations in traditional currencies in their financial statements.

The FASB has no immediate plans to review its treatment of Bitcoin as the issue affects few of its constituent parts, according to a source familiar with the matter.

“I don’t think it’s the best bookkeeping yet,” said Robert Hertz, a former FASB chairman. “I hope the accounting standards board will rethink the method of accounting as more mainstream companies move to Bitcoin.”

Outside of the US, cryptocurrencies are usually treated as intangible assets as well. In contrast to the guidelines under the FASB rules, depreciation can be reversed in future years. In certain cases, companies can record Bitcoin at market value. See EXPLAINER:

CRYPTO BILLIONS OF COMPANIES

Listed companies collectively hold around $ 9 billion worth of Bitcoin, data on the Bitcoin Treasuries website shows. Around 80% are held by Tesla and MicroStrategy, the latter with over USD 4.5 billion.

Square, which allows users to buy and sell Bitcoin, announced last month that it had expanded its register by an additional $ 170 million.

Of course, if the price of Bitcoin goes up, a company can always just sell its holdings and thus make some profit. Even so, it is a risky investment as the cryptocurrency fluctuates wildly.

For example, in 2013, Bitcoin started at around $ 13 and rose to over $ 1,000. In 2017 it rose from around $ 1,000 to around $ 20,000. In early 2020, it dropped below $ 4,000. It fell more than 25% late last month just a week after hitting a record high of over $ 58,000. It has now made up some of its losses.

About 5% of chief financial officers (CFOs) and chief financial officers said they plan to keep Bitcoin on their balance sheets in 2021. This was the result of a survey by the US research company Gartner of 77 executives last month.

84% of respondents said they had no plans to ever hold it as a company asset, citing volatility as a top concern, followed by board risk aversion, slow adoption as a widespread payment method, and regulatory issues.

“For the most part, I think companies will avoid such things,” said Jack McCullough, president of the CFO Leadership Council and former CFO.

“CFOs are likely to be very conservative about managing corporate treasuries. They like to sink money in very safe places with low interest rates. Your job is to make the company grow by doing business, and the treasury must be safe and secure. “

WHY PUT MY NECK ON THE LINE?

However, proponents of cryptocurrencies say the reasons for companies buying Bitcoin are clear, not least the decline in the dollar – the dominant reserve currency – which fell about 4.5% against a basket of major currencies over the past year.

“The value of the dollar is getting weaker and weaker over time,” said Dave Sackett, CFO of ULVAC Technologies Inc, the US subsidiary of a Japanese manufacturer of vacuum devices and an active investor in cryptocurrency.

“Bitcoin flips the script.”

Sackett accused ULVAC executives of investing in Bitcoin last April, suggesting taking a risk and then cashing it out with potential profits. You passed the opportunity, he said.

Other potential issues for executives include questions about how a company can keep a cryptocurrency safe and how much it should tell shareholders about safety precautions, said Tim Davis, a principal in the finance and risk advisory practice at Deloitte & Touche, the companies advising crypto on their balance sheets hold.

High profile thefts from exchanges have highlighted problems with securely storing digital assets. Losing passwords for digital wallets is also a risk. Offline or “cold” storage is widely considered to be the best defense against hackers, but there are few, if any, regulatory standards.

“Do you custody it yourself?” Said Davis. “Do you have custody of it? How much of it would you like to have in a hot wallet versus a cold wallet? “

Ultimately, experts say, the expansion of companies with no existing connections to the cryptocurrency market to Bitcoin may depend on the willingness of finance managers to take risks.

“The general consensus among treasurers is that very few of them will follow this trend first,” said Naresh Aggarwal of the UK Association for Corporate Treasurers.

“If I’m right as the treasurer and the price doubles, the company can sell its stake and make a profit. The company is worth more, but it’s not reflected in my compensation, ”he added.

“But if the price falls, I’m pretty confident that I’ll be fired. Why should I bother putting my neck on the leash? “

Reporting by Tom Wilson and Anna Irrera in London and Jessica DiNapoli in New York; Editing by Pravin Char