Rather than investing in traditional low-risk, low-yield assets like commercial paper, money markets and government debt, corporations are increasingly converting cash reserves into digital currencies.
For many, cryptocurrencies are a hedge against inflation concerns that have been amplified as the economy recovers from the pandemic. However, any business dealing in cryptocurrency should be aware of the particular risks, such as shareholder doubt, private litigation and increased regulatory scrutiny. At the very least, companies should have proper legal guidance in matters of cryptocurrency.
From novelty to legitimate investment
Once considered a novelty among amateur investors, cryptocurrency has gained much traction in recent years. Many investors regard crypto as “digital gold” because it is meant to retain its purchasing power while other currencies do not. No central bank regulates the price of crypto; the supply is limited; and crypto is less affected by Federal Reserve policies; therefore, crypto may be more likely than other currencies to retain its value.
Forward-thinking companies have embraced these circumstances, pouring billions of dollars into cryptocurrency — primarily Bitcoin. So far, the corporations leading the way are software company MicroStrategy, Inc., financial tech firm Square, and Elon Musk’s Tesla. However, Musk’s actions and statements alone regarding crypto have led to massive price swings.
What are the risks for money managers?
Executives must weigh many considerations when investing in digital currencies. Such considerations include:
- Fiduciary duty: Is buying crypto in the best interests of shareholders?
- Volatility: Wild and sometimes random fluctuations in prices are common.
- Storage: Owners who lose the private code to their “digital wallets” have no way to access these assets, and many have been locked out.
- Hackers: As companies invest more in crypto, they become bigger targets for digital thieves.
- Lawsuits: Some shareholders have concerns over a lack of transparency regarding crypto assets, and how this lack of transparency may conflict with mission statements.
Uncertainty abounds regarding federal regulations
To complicate matters, the Financial Accounting Standards Board, which sets the standards for U.S. companies, has not drafted any guidance regarding cryptocurrency. Also, U.S. Generally Accepted Accounting Principles (GAAP) make no mention of handling digital assets.
Consequently, companies apply accounting rules for intangible assets to digital currency holdings, making it difficult to document the return on investment. The lack of standards also creates challenges regarding public disclosure requirements to the U.S. Securities and Exchange Commission (SEC). Meantime, the SEC has made cryptocurrency regulation a priority, even in the midst of confusion and mixed messages about the applicability and scope of securities regulations.
If you have questions about any of these matters, the law firm of Ford O’Brien Landy, LLP, can assist. Our firm provides crypto compliance and regulatory defense to clients in New York and nationwide.
Source: Forbes, “Crypto Goes Corporate: Litigation Sure To Follow,” May 26, 2021