Can regulation make Bitcoin more attractive to treasury professionals?

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Governments worldwide are paying close attention to cryptocurrencies, of which there are almost 1,000 now in existence. Regulatory reform is expected soon.

 

The currencies, with Bitcoin being the best known, were created for peer-to-peer e-commerce, and designed to reduce the expensive currency conversions that are required for cross-border transactions. With such savings to be made, it is no surprise that they have attracted the attention of corporate treasurers, and not only those involved in the e-commerce sector.

 

Treasurers are interested in three areas of potential improvement. Settlement, taking the friction out of the links in the supply chain and tokenisation. But they should be wary of the currencies in case one day they find themselves managing the risks associated with them.

 

Powers

 

The good news is that governments around the world are taking a closer interest in virtual currencies and discussing new regulatory powers to deal with them. Unfortunately, the driving force for much of this interest is the criminal use of the currencies, which is hardly likely to enhance their attraction to the average corporate treasurer.

 

Australia has plans to revise its anti-money laundering legislation and to regulate digital currencies including bitcoin in the wake of a financial scandal involving its largest bank, Commonwealth Bank of Australia. Reforms would bring any digital currency exchanges within Austrac’s remit.

 

Nonetheless, any regulation is bound to alleviate some of the risks, but not all of those that concern treasurers. Price volatility is a major concern, as was evidenced by the dramatic fall in the value of Bitcoin at the turn of the year. This was partly caused by the fact that the market for Bitcoin is smaller than normal FX markets and so swings can be much more dramatic.

 

Although this is a major headache for treasurers, there are tools in the pipeline to smooth their path and allow them to treat it like other fiat currencies, the nascent Bitcoin derivatives markets being one of them. Even so, the ability to hedge will not in isolation persuade companies that the level of risk and the cost of hedging it is acceptable.

 

Volatility

 

One other issue associated with this problem is the shortage of reliable exchanges.

 

Bitcoin took a huge step towards respectability at the end of last year when it began trading on the Chicago CME, the largest futures market in the world. This followed on from trading on the Cboe options exchange also based in Chicago. The entry of the CME should improve liquidity in the currency, making it easier to trade. However, recent events have shown it has done little to reduce the volatility in the currency’s value.

 

Things may improve now that BitFlyer, currently the largest bitcoin exchange in the world, has been given approval to operate in the European Union, following its regulatory approval in Japan and the USA. The platform traded almost US$250bn during 2017. As the only exchange licensed in Europe, BitFLyer can give traders and investors access to the world’s largest bitcoin market: Japan.

 

Still, concerns over Bitcoin’s liquidity mean that corporate FX managers are reluctant to see it as an alternative to fiat currencies, and the low number of bitcoins in existence makes it difficult to trade. In addition, the lack of a robust market infrastructure means that trading is likely to be of smaller quantities than corporates prefer for daily trades, potentially incurring large bid/spread asks, meaning greater costs and increased price exposure.

 

The collapse of Mt Gox, a substantial exchange in Tokyo, highlighted the settlement issues associated with Bitcoin, particularly the fact that it is not backed by a central bank, as national currencies are.

 

While regulators issue warnings, matters will not improve unless they act to bring the currencies within the regulatory umbrella. Once that takes place, many treasury experts believe that there is a strong possibility of using cryptos as transaction currencies. Once it gains traction within the system, the blockchain technology could smooth FX and dramatically reduce costs.

 

Bitcoin acceptance is thus steadily growing among corporate treasurers and their boards. The strategy for most treasurers should be to investigate how they might manage the currency in the future as they wait for the regulatory authorities to act.

 

This may include plans to minimise holdings in Bitcoin to reduce liquidity risk, backing up and encrypting any online wallet, and using counterparties to exchange Bitcoin into hard currencies. Treasurers will also need to ensure robust internal procedures to track crypto currency transfers.

 

Simon Lynch is the owner of Treasury Talent

Treasury Talent is a specialist treasury talent provider solely focussed on the treasury market with offices in Sydney covering Australia, Singapore covering Asia, and San Francisco covering California and the USA. To make contact simon@treasurytalent.net

 

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