Why many companies steer clear of bitcoin

Accounting for and storing highly volatile asset are headaches, and few willing to risk reputation on it

A cryptocurrency mining data centre in Russia. While proponents see bitcoin as an inflation hedge, a survey shows some 84 per cent of respondents were against holding it as a corporate asset, citing volatility as the top concern, followed by board ri
A cryptocurrency mining data centre in Russia. While proponents see bitcoin as an inflation hedge, a survey shows some 84 per cent of respondents were against holding it as a corporate asset, citing volatility as the top concern, followed by board risk aversion, slow adoption as a widespread payment method and regulatory issues. PHOTO: REUTERS

(REUTERS) - When Mr Elon Musk's Tesla became the biggest name to reveal it had added bitcoin to its coffers last month, many pundits were swift to call a corporate rush towards the booming cryptocurrency.

Yet there is unlikely to be a concerted crypto charge any time soon, say many finance executives and accountants loath to risk balance sheets and reputations on a highly volatile and unpredictable asset that confounds convention.

"When I did my treasury exams, the thing we were told as the No. 1 objective is to guarantee security and liquidity of the balance sheet," said Mr Graham Robinson, a partner in international tax and treasury at PwC.

"That is the fundamental problem with bitcoin, if those are the objectives for treasurers, then breaking them could get them in trouble."

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 attractive high-yielding assets hard to find.

While the moves have prompted more boardroom discussions though, headaches from bitcoin's volatility to accounting for it and storing it are likely to preclude a big wave of companies holding large amounts on balance sheets in the short term, according to over a dozen financial officers, board members and accountants interviewed by Reuters.

"It will take more than a small handful of disruptive companies investing in bitcoin to impact the narrative in boardrooms," said Mr Raul Fernandez, an entrepreneur and investor who sits on the audit committee of the board of chipmaker Broadcom.

One problem could lie in the devil of the accounting detail in a bookkeeping industry that, like many others, is still taking stock of the nature of cryptocurrencies.

The Financial Accounting Standards Board (FASB), which sets accounting standards for US corporations, does not have guidance specific to the accounting for cryptocurrencies.

However, consistent with discussions among a separate US trade body, companies apply existing FASB guidance on the accounting for "intangible assets", which usually include intellectual property, brand recognition or goodwill.

Under these rules, companies other than investment firms or broker-dealers cannot book gains in the value of holdings should the price of bitcoin rise - but must write down their investment as an impairment charge if it falls.

Furthermore, once a company writes down its holdings, it cannot record subsequent gains until it sells. By contrast, companies periodically reflect the impact of fluctuations in traditional currencies in their financial statements.

Outside the United States, cryptocurrencies are usually treated as intangible assets too. But in contrast to guidance under the FASB rules, write-downs can be reversed in future years. In certain cases, companies can record bitcoin at market value.

Publicly listed companies together hold around US$9 billion (S$12.1 billion) of bitcoin, data from the Bitcoin Treasuries website shows. Around 80 per cent is held by Tesla and MicroStrategy, the latter with over US$4.5 billion.

Square, which allows users to buy and sell bitcoin, said last month it had added an additional US$170 million of the virtual coin to its coffers.

Of course, if the price of bitcoin rises, a company can always simply sell its holdings, thus realising some gains. Yet it is still a risky investment, given the cryptocurrency's record of wild swings.

In 2013, for example, bitcoin started at around US$13 and spiked to over US$1,000. In 2017, it went from about US$1,000 to around US$20,000. Early last year, it sunk below US$4,000. This month, it was trading above US$60,000.

About 5 per cent of chief financial officers and senior finance leaders said they planned to hold bitcoin on their balance sheets this year, a survey of 77 executives by US research firm Gartner found last month.

Some 84 per cent of respondents said they did not plan to ever hold it as a corporate asset, citing volatility as the top concern, followed by board risk aversion, slow adoption as a widespread method of payment and regulatory issues.

Other potential headaches for executives include questions over how a company can safely hold a cryptocurrency, and how much it should disclose to shareholders about security precautions.

High-profile thefts from exchanges have highlighted problems over safely storing digital assets. The loss of passwords for digital wallets is also a risk. Offline or "cold" storage is widely seen as the best defence against hackers but there are few, if any, regulatory standards.

"The consensus among treasurers is that very few of them are going to follow this trend initially," said Mr Naresh Aggarwal of the United Kingdom's Association of Corporate Treasurers.

"As a treasurer, if I am right and the price doubles, the company may sell its holding and make a profit. While the company may be worth more, it won't be reflected in my compensation," he added.

"But if the price falls, I am pretty confident I will be fired. Why bother putting my neck on the line?"