- Cash Savings in Treasuries
- Options for Treasury Managers
- Custodian vs Self-Custody
- Accounting & Tax Implications
Cash Savings in Treasuries
Treasury managers face a significant challenge in preserving the value of their reserves. Traditional cash savings, once considered a safe haven, have become increasingly unsuitable for long-term corporate savings.
This shift is primarily due to the ongoing dilution caused by money supply growth, as central banks worldwide engage in quantitative easing and other expansionary policies. Consequently, the purchasing power of cash holdings steadily erodes over time, making it difficult for corporations to maintain the real value of their savings, let alone grow them.
Options for Treasury Managers
Faced with the inadequacy of current savings assets to meet equity return expectations, treasury managers must explore alternative strategies. One common approach is returning funds to shareholders through stock buybacks or dividends. While this may appease shareholders in the short term, it can leave companies financially vulnerable, especially during economic crises. The dangers of this corporate decapitalisation became glaringly apparent during the Covid pandemic when many companies found themselves with little financial cushion to weather the storm.
Another option is investing in treasury bonds. These government-issued securities offer a relatively safe investment with a fixed rate of return. However, in the current low-interest-rate environment, the yields on treasury bonds often fail to outpace inflation, resulting in negative real returns over time.
Digital assets, particularly Bitcoin, have emerged as a promising alternative for corporate treasury strategies. As a decentralised digital asset with a fixed supply, Bitcoin offers several advantages. It provides protection against the dilution effect that plagues traditional cash savings, has shown significant appreciation over longer time horizons, and offers global liquidity. Additionally, incorporating Bitcoin into a corporate treasury can serve as a hedge against inflation and currency devaluation risks.
Custodian vs Self-Custody
When considering Bitcoin as part of a treasury strategy, corporations must decide between custodial and self-custody solutions. Custodial services, offered by reputable financial institutions, manage and secure Bitcoin holdings on behalf of the corporation. This option may be attractive for companies lacking in-house expertise in cryptocurrency management. However, it requires trusting a third party with the assets.
Self-custody, on the other hand, involves the corporation managing its own Bitcoin holdings. This approach offers maximum control and potentially lower fees but requires a significant investment in security infrastructure and expertise. Treasury managers must carefully weigh the trade-offs between security, convenience, and cost when choosing between these options.
Accounting & Tax Implications
Incorporating Bitcoin into a treasury strategy introduces accounting and tax considerations. Under current accounting standards in many jurisdictions, Bitcoin is often treated as an intangible asset. This classification means that while companies must record losses when the value of Bitcoin decreases, they cannot recognise gains until the asset is sold. This asymmetrical treatment can lead to significant volatility in reported earnings.
From a tax perspective, the treatment of Bitcoin varies widely between countries. In some jurisdictions, it may be subject to capital gains tax when sold, while others may treat it as foreign currency. Treasury managers must stay abreast of the evolving regulatory landscape and work closely with tax professionals to ensure compliance and optimise their tax strategy.
