For most treasurers, having to manage cryptocurrency is a question of timing. While only a small proportion of companies already accept cryptocurrency, most recognize that this will change, perhaps in the very near future. And when it does, companies that are crypto-ready may have a competitive advantage over those that are not.
While the decision on whether to accept cryptocurrency will vary between companies, treasurers should at least work to understand the steps needed to be able to do so when the decision is made. Importantly, becoming crypto-ready is not as simple as just setting up another bank account. So, what needs to be done?
Establish new relationships. Cryptocurrency is processed through digital wallets, rather than traditional bank accounts. At present, few banks offer access to wallets, so treasurers will need to establish a new relationship with an organization that does.
Perform due diligence. Treasurers will need to perform detailed due diligence on the prospective partner, especially because crypto exchanges are not subject to the same level of regulatory oversight as banks.
Decide how to manage the wallets. Treasurers have a choice: to manage wallets in-house or outsource management to the crypto exchange. Because wallets are accessed via the use of private keys, managing wallets in-house requires a degree of internal IT support to both control access to the keys and protect the keys against loss. Outsourcing takes wallets out of the direct control of the company, meaning a greater counterparty exposure.
Decide whether to hold cryptocurrency. Because of some cryptocurrency’s potential price volatility, counterparty risk and accounting treatment (as cryptocurrency is considered a digital asset, rather than a traditional, or fiat, currency), many companies will choose not to hold cryptocurrency on their balance sheet. Instead, they will transact cryptocurrency receipts into fiat currency straightaway.
Manage internal partners. There are different tax, legal and accounting implications when holding and transacting in cryptocurrencies. Internal partners will need to understand and accept the risks before board-level approval is available.
Establish operating procedures. These will be dictated by the decisions on how the cryptocurrency will be managed and whether any cryptocurrency will be held.
Consider running a pilot project, if appropriate. A pilot project will help navigate the internal hurdles outlined above and will establish relationships with third parties that can be leveraged as business lines develop. Starting small, perhaps by issuing a few NFTs, will limit the financial risk but help treasury and the wider business understand the nature of the exposures, so risks can be addressed before the financial risks do become potentially significant.
Get auditor approval. Getting internal auditor approval for operating procedures will ensure they can be implemented when needed. Once a project has been implemented, whether as a pilot or not, external auditors will also review processes to ensure cryptocurrency is managed correctly.
Want to learn more? Check out the 2022 AFP Payments Guide to Cryptocurrency and Non-fungible Tokens for Corporate Payments, underwritten by MUFG.