Crypto goes corporate: mythbusters
If you broach the topic of cryptocurrencies with companies, the response you often get is that they are just too risky and volatile an asset for them to even consider. “Investing in cryptocurrencies is not something my CFO would ever sign off on,” one corporate treasurer told me. Another common refrain is that crypto isn’t relevant to me, as it is not legal tender or a widely adopted method of payment?
But do these assumptions or views about cryptocurrencies hold true, particularly given that more corporate and institutional money than ever before is piling into crypto? According to Bitcointreasuries.net, almost $10 billion has been invested in cryptocurrencies like BTC by companies from the US, Canada, Germany, Australia, Hong Kong, and Norway. Many of the companies on Bitcointreasuries list are blockchain or bitcoin miners. Others, however, like MicroStrategy, Square, and Tesla, are publicly listed companies whose stocks are traded on traditional financial markets.
You’re probably thinking these companies are the exception rather than the norm, but crypto experts say companies have been investing in crypto on the quiet for some time now. At CoinLoan, several hundred corporate users are now registered, and incoming requests for corporate accounts are up 70% this year compared to last. And in the next few years, cryptocurrencies are expected to become more of an institutional rather than just a retail market.
So, armed with that information, let’s explore some of the most commonly held assumptions companies make about crypto.
1. Cryptocurrencies are too volatile for my company to invest in
There is no question cryptocurrencies are volatile, which can be attributed to their limited supply. Just in the last five months, the price of BTC went from a record high of almost $68,000 in November 2021 before crashing back down to $35,000 on 22 January. But given the underperformance of traditional safe-haven assets like gold during the pandemic, the low interest-rate environment that has persisted due to monetary policy easing by central banks, and the high inflation environment we now find ourselves in, some large corporate holders of BTC like MicroStrategy argue that cryptocurrency is a more dependable store of value than holding fiat currencies like the dollar.
In addition to cryptocurrencies’ limited supply, another factor that can contribute to their pricing volatility is large players, or whales, buying and selling cryptocurrencies, which gives them market-maker powers. But as cryptocurrencies attract more liquidity, this could help drive low volatility as volumes continue to grow. One way of countering the unpredictability of cryptocurrencies is to buy stablecoins whose value is pegged to fiat currencies like the dollar. The most popular stablecoins are USDC and Tether (USDT). Between 75% to 80% of CoinLoan’s corporate customers use USDC or USDT to make transactions or deposits.
USDC and USDT are called collateralized stablecoins, which means they are backed by collateral in the form of commercial paper, cash, bonds, and other liquid assets in order to maintain their 1:1 peg to the dollar. Holders of these tokens should be able to easily redeem them for cash or other real-world assets. There are also algorithmic stablecoins, which aren’t backed by fiat currencies or physical assets. Instead, they use an algorithm based on certain assumptions to guarantee price stability. But this algorithm may not actually reduce risk as was demonstrated recently with the collapse of UST, which lost parity with the dollar.
Cryptocurrencies will continue to be volatile, but for companies that can navigate some of the risks, the potential upside means they may be willing to tolerate the downside. CoinLoan sees varying crypto strategies from its corporate customers. Some may hold crypto for several months, achieve a certain level of profit, and then convert their crypto funds back to fiat currencies. Other companies may deposit their crypto into a CoinLoan Interest Account, where the interest they earn is typically higher than financial rates offered by traditional banks.
2. Crypto is not relevant to my company
Other than investing, what other use cases are there for crypto? Well, you may not be able to pay for your coffee directly using BTC, but according to online publication Small Business Trends, companies like Starbucks use a third-party digital wallet application that allows you to convert BTC to dollars to spend at merchants.
The number of companies that accept cryptocurrency as payment is growing by the day. In the first quarter of this year, Visa says customers made approximately $2.5 billion in payments with crypto-linked cards. CoinLoan is also getting inquiries from companies wanting to make crypto or stablecoin payments to team members in different parts of the world. “In the last one or two years, lots more companies are using crypto to make payments to employees or contractors,” says Mike Rozhko, head of business development at CoinLoan. “It is easy to understand why. Crypto is faster and cheaper than a traditional bank transfer.”
Crypto payments are also a way for companies to tap into new markets or customers. Other use cases for crypto include using it as collateral for a loan. On CoinLoan, companies can deploy their cryptoassets as collateral to obtain an instant loan in fiat or cryptocurrency. The average loan size on the platform is between $3 million and $5 million plus and growing.
3. Crypto is not regulated
While different use cases for cryptocurrencies are growing by the day, many companies still see it as a regulatory Wild West. High-profile hacks of crypto exchanges, wallets, and DeFi platforms provide almost daily fodder for headline writers. It’s fair to say that the regulatory landscape for cryptocurrencies is somewhat of a mixed bag, with different jurisdictions and regulatory authorities treating cryptocurrencies and firms that deal in digital assets differently.
However, it is a mistake to think that cryptocurrencies aren’t regulated at all. CoinLoan, for example, is a licensed VASP, or Virtual Asset Service Provider, a term coined by the Financial Action Task Force, which implements anti-money laundering and financing of terrorism proliferation standards.
Centralized cryptocurrency exchanges licensed under the VASP regime must adhere to the same regulatory and supervisory standards as traditional financial service providers. They must conduct KYC and AML checks on every customer. Additionally, CoinLoan is also an authorized financial institution in Estonia, which adds an additional layer of reliability. This authorization is issued by the Estonian Financial Intelligence Unit. In 2020, Estonia tightened its Money Laundering and Terrorist Financing Prevention Act, requiring crypto firms to appoint a compliance officer, establish the firm’s main place of business as Estonia, and ensure they have a payment account with an institution registered in Estonia or the EU. CoinLoan was one of 104 companies that have complied with the updated guidelines so far.
Suffice to say, as corporate and institutional interest in crypto grows, so too will regulator’s focus on this space.