Bitcoin and other digital assets are increasingly used by companies worldwide for investment, operational, and transactional purposes. Any frontier comes with unknown hazards, but also strong incentives. Discover the types of questions and insights enterprises should consider when deciding how and whether to utilize digital assets.
Why consider using crypto?
More than 2,300 US businesses accept bitcoin, according to one estimate from late 2020, and that doesn’t include bitcoin ATMs. An increasing number of companies worldwide are using bitcoin and other digital assets for a host of investment, operational, and transactional purposes.
The use of crypto for conducting business presents a host of opportunities and challenges. As with any frontier, there are both unknown dangers and strong incentives. That’s why companies venturing to use crypto in their businesses should have two things: a clear understanding of why they are undertaking that action and a list of the many questions they should consider.
This paper endeavors to provide you and your company with an overview of the kinds of questions and insights enterprises should consider as they determine whether and how to use crypto. So, if your company plans to participate in crypto, it’s important to think ahead, prepare, and engage in a thoughtful manner. (For considerations related to investing in crypto currencies and digital assets, please consult Deloitte’s complementary report, Corporates investing in crypto: Considerations regarding allocations to digital assets.)Why consider using cryptoDownload the PDF
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What can crypto do for your company?
To spark your company’s thinking about crypto, here are some of the rationales behind why some companies are currently using crypto:
- Crypto may provide access to new demographic groups. Users often represent a more cutting-edge clientele that values transparency in their transactions. One recent study found that up to 40% of customers who pay with crypto are new customers of the company, and their purchase amounts are twice those of credit card users.
- Introducing crypto now may help spur internal awareness in your company about this new technology. It also may help position the company in this important emerging space for a future that could include central bank digital currencies.
- Crypto could enable access to new capital and liquidity pools through traditional investments that have been tokenized, as well as to new asset classes.
- Crypto furnishes certain options that are simply not available with fiat currency. For example, programmable money can enable real-time and accurate revenue-sharing while enhancing transparency to facilitate back-office reconciliation.
- More companies are finding that important clients and vendors want to engage by using crypto. Consequently, your business may need to be positioned to receive and disburse crypto to assure smooth exchanges with key stakeholders.
- Crypto provides a new avenue for enhancing a host of more traditional Treasury activities, such as:
- Enabling simple, real-time, and secure money transfers
- Helping strengthen control over the capital of the enterprise
- Managing the risks and opportunities of engaging in digital investments
- Crypto may serve as an effective alternative or balancing asset to cash, which may depreciate over time due to inflation. Crypto is an investable asset, and some, such as bitcoin, have performed exceedingly well over the past five years. There are, of course, clear volatility risks that need to be thoughtfully considered.
Two primary paths for using crypto
The first question to ask when considering using crypto in your company’s operations is: Do we hold crypto on our balance sheet or simply adopt crypto-enabled payments? To determine the right path for your business, you need to make a careful determination of the best fit for your business objectives. Consider the potential benefits, drawbacks, costs, risks, system requirements, and more. The following sections will provide some broad considerations around two different paths as your company embarks on its crypto journey.
Enabling payments: “Hands-off”
Some companies use crypto just to facilitate payments. One avenue to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a “hands-off” approach that keeps crypto off the books.
Enabling crypto payments, such as bitcoin, without bringing it onto the company’s balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.
The third-party vendor, acting as an agent for the company, accepts or makes payments in crypto through conversion into and out of fiat currency. This may be the simplest option to pursue. And, in all likelihood, it may cause relatively few disruptions to a company’s internal functions, since the “hands-off” approach keeps crypto off the corporate balance sheet.
The third-party vendor, which will charge a fee for this service, handles the bulk of the technical questions and manages a number of risk, compliance, and controls issues on behalf of the company. That does not mean, however, that the company is necessarily absolved from all responsibility for risk, compliance, and internal controls issues. Companies still need to pay careful attention to issues such as anti-money laundering and know your customer (AML and KYC) requirements. And, of course, they also need to abide by any restrictions set by the Office of Foreign Assets Control (OFAC), the agency that administers and enforces economic and trade sanctions set by the US government.
• The company is heavily dependent on that vendor to perform careful due diligence about the vendor’s resilience and responsiveness in meeting its expectations.
• Think through the customer experience in terms of accepting and issuing crypto payments and how that will be affected by vendor action or inaction.
• As part of due diligence, pay close attention to the vendor’s internal controls and security over their operations, such as cybersecurity in conformity with accepted standards, detection of fraud schemes, and the reliability and accuracy of all conversions to fiat currency, as well as to all accounting and tax information relayed by the vendor. Ideally, the vendor can provide some third-party assurance about these issues, such as a System and Organization Controls (SOC1 or SOC2) report.
• Understand the vendor’s conversion pricing and if the company is at risk of pricing volatility.
• Since the third party is an agent, ensuring that settlement actually occurs is still the responsibility of the company. You cannot shift all regulatory and compliance responsibility to another provider.
Enabling payments: “Hands-on”
If a company is ready to go beyond simply enabling crypto payments and intends to broaden crypto adoption within operations and the treasury function—in other words, to go the “hands-on” route—it may potentially find a significant increase in benefits, as well as in the number of technical matters to address.
To ready itself, the corporate treasury might consider several preliminary issues, including:
What does the company want to achieve by adopting the use of crypto?
What steps has treasury taken to acquire the necessary know-how to receive, monitor, and manage a crypto payment?
Does Treasury think the company should maintain custody of the crypto itself or outsource that to a third party?
What measures are in place, or what thought has been given, to possibly investing in crypto as a new asset class?
What adjustments does Treasury foresee in anticipation of the eventual issuance of digital currencies by central banks?
Treasury will be inextricably involved in these decisions, and the changes they require, since:
Traditional treasury groups maintain the financing relationships for the company (e.g., banking groups, investment partners, third-party working capital providers).
Treasury determines which types of banking and financial services—now in a potentially broader and bolder digital asset ecosystem—corporates will need.
There are two paths a company can follow when embarking on a broader “hands-on” adoption of crypto:
Use a third-party vendor or custodian to maintain custody of the crypto on a blockchain and provide wallet management services that facilitate the tracking and valuation of the crypto assets.
Integrate crypto into the company’s own systems and manage its own private keys. (Consult your legal counsel to determine whether any license will be required to enable the transmission of crypto.)
Most companies currently using crypto in a “hands-on” fashion use a third-party custodian. Given that tendency, we will examine this path in greater detail.
The second approach, self-custody, presents more complexity and requires deeper experience. Moreover, if the company follows this route, it will likely have greater accountability for the work supporting its transactions. That said, much, if not most, of what follows will also be applicable to companies that self-custody.
Wallets and tracking
Crypto is held and managed in digital wallets. An appropriate wallet structure is fundamental to a successful crypto treasury function. Many entities have adopted a multitiered structure whereby “hot wallets” are used as operational accounts, as opposed to “cold wallets” that are used to store value. For entities with high volumes of transactions, tracking the details of those transactions can become a significant pain point.
Tracking usually entails keeping detailed records of the date and time of acquisition of the crypto, value and assigning of basis, etc. In many cases, entities have chosen to convert to stablecoins to reduce the uncertainty related to price fluctuations of traditional crypto assets. (For more on the use of these wallets and the importance of basis tracking, see Corporates investing in crypto and “Tax treatment of crypto payments” and “Tax treatment of crypto expenditures” below.) For example, that conversion may entail moving from bitcoin to a stablecoin such as USD Coin (USDC), Gemini Dollar (GUSD), or Paxos Standard Coin (PAX). Once the swap is done, the crypto is more readily usable for traditional bank and treasury transactions. That includes disbursements or executing on-demand payments now facilitated with real-time transparency for pertinent parties, without the delays and costs of traditional wire transfers.
While “cold wallets” should be used for long term storage, “hot wallets” are important for several other reasons. Notably, they can capture current information about crypto status for immediate operational purposes. They also help with forecasting the multiple purposes to which crypto will be put or stored. In addition to supporting immediate operational goals, “hot wallets” facilitate:
• Rapid payments
• Transfer of funds in crypto
• Short-term savings and investments that approximate the benefits of money markets
Most significantly for the treasury function, “hot wallets” provide the appropriate clarity and visibility to help Treasury determine or adjust the right allocations of crypto on an ongoing basis.
Anti-money laundering and know your customer
AML and KYC regulations have implications for users of a crypto network. That’s especially true if they are accepting large payments from foreign customers. Companies need to be aware of their obligations to ensure they are not unintentionally enabling money laundering through foreign vendors or suppliers along a complex international supply chain.
In addition, since all companies must comply with the rules and regulations established by OFAC, they must be in a position to determine (or have a trusted third party determine) the sourcing of any crypto it accepts or ultimately disburses. It should be alert to sanctioned and restricted bitcoin and other crypto addresses.
One area of innovation that companies should watch for is “second-layer protocols.” Simply put, these are scaling applications that sit on top of blockchain systems. They endeavor to make crypto transactions faster and cheaper. Second-layer protocols are rapidly maturing and likely will soon compete with traditional payment systems. And, possibly, they may become more effective and preferable to the traditional payments systems in use today.
It’s not unusual, for example, to find these kinds of platforms underlying systems that allow subscribers or players to purchase small enhancements or upgrades to a system or to games they may be playing. But when used in a corporate setting, there is, nevertheless, some risk. The reason is that the transaction is not immediately recorded on the blockchain. Instead, in order to be recorded, a series of smaller transactions needs to be aggregated. Only after all transactions have been finalized can the net activity be settled on chain. It is during that transition from execution to recording on the blockchain that there can be room for error or manipulation by a hostile party, should they gain access to the network.
Despite these risks, the reason to use second-layer protocols is clear. With relatively small payments or transfers, from a cup of coffee to a weekly salary check, the direct settlement fee on a blockchain today may well exceed the value of the item being sold or the payment being made. With second-layer protocols, however, transaction fees tend to be much smaller, and transactions settle faster.
We anticipate there will likely continue to be innovation in both the scaling and fee economics of blockchains. That may well drive competition with traditional payment systems. Watch this space.
Additional considerations for a “hands-on” approach
Tax and accounting considerations
Tax and accounting treatments for enterprises using digital assets depend on a number of variables. So, let’s begin with a few general statements. They can help set the stage for an overview of the main questions and potential issues companies may need to address.
• Using crypto as a means of exchange, in a manner similar to fiat currencies, presents particular accounting challenges. Crypto is generally considered an intangible asset. It may well warrant adjustments or additional disclosures to P&L and cash flow statements, among other financial documents.
• For tax purposes, the use of crypto for receiving or making payments may be treated as a barter transaction (a nonmonetary exchange of goods, services, or nonfinancial assets between two counterparties).
• The volatility of the price of the crypto through the transaction life cycle plays a significant role in determining the value of a digital asset. That’s the case for both accounting and tax.
Tax treatment of crypto payments
For tax purposes, the value of crypto is established at the time the payment becomes fixed and determinable. That may correlate with the time the crypto is received rather than when the contract is entered. For tax, as is typically the case for barter transactions, the company must establish the readily ascertainable fair market value of the asset at the time of receipt. That value is typically arrived at by using a block explorer or value aggregator.
Here are some important considerations to weigh:
• The company must record the time and value of the crypto at the time of receipt or when the company has dominion and control.
• That information can enable the company to establish and track the tax basis for the crypto. That way it can be referenced once or used or exchanged for another crypto or fiat.
• It is important to follow a systematic and rational methodology for establishing and tracking basis and for keeping detailed and appropriate documentation. This becomes critically important when under examination by the IRS, a state, or international taxing authority.
• When the company receives the crypto payment, it must track it carefully to calculate any applicable sales tax, indirect taxes, value-added tax, goods and services tax, etc. At present, most governmental authorities only accept payment in fiat currency. Hence, the company must maintain robust documentation and an appropriate process. That can help ensure that the amount of the crypto collected for indirect tax can be then remitted in fiat currency to the appropriate agency.
• An embedded mark-to-market derivative, used by the accounting department to track the value of the crypto, may or may not be recognized for tax.
Tax treatment of crypto expenditures
When the company uses crypto for an expenditure, there are typically two legs to the transaction: (1) the gain or loss on the crypto (which may well have changed in value); (2) the expense or payment itself. The value of the crypto at the time of the transaction likely determines what is called the “more readily ascertainable fair market value” for this barter transaction. And, as with revenue, it is important to keep appropriate documentation on how the value was determined. Again, here’s what’s different from using fiat currency to pay a vendor: Crypto triggers a gain or loss on the underlying asset used in the transaction. Accordingly, it’s imperative that the company create appropriate wallet structures that enable segregated tranches of crypto.
By maintaining segregated tranches and wallets, each with their tracked basis, the company can determine exactly which digital asset it is using and how much gain or loss it is triggering with the transaction. It is also important to determine the character (ordinary or capital) of the gain or loss triggered upon usage of the crypto.
The use of crypto for payroll purposes requires several careful considerations:
• Processes are needed to track withholding taxes for W-2s properly.
• Most tax authorities don’t accept crypto. The company will need to remit fiat currency for the payment of withholding taxes. That may then require additional exchange transactions (crypto for fiat currency) before remittance.
• Crypto does not generate conventional bank statements. So, provisions need to be made to capture and disclose all pertinent transaction-level detail. The company will need to supply that information to the IRS, state, or foreign tax authorities.
• Public companies have additional considerations for officers remunerated with crypto (e.g., proxy statements).
Accounting for crypto payments
As with regular business transactions, revenue recognition rules govern the accounting for digital assets received by a company as payment from a customer in return for a company’s goods or services.
• When the company agrees to receive or accept consideration from a customer that is not cash, the value of that noncash consideration is determined at the contract’s inception.
• Consequently, the price of the good or service that drives the recorded revenue is determined up front based on the value of the crypto. Subsequent changes in the value of the crypto do not alter the amount ultimately recognized by the company as revenue. That’s the case regardless of the timing of the delivery of the underlying good or service to the customer, all in accordance with the terms of the contract or receipt of the crypto.
• However, the changes in value of the crypto asset may still require separate accounting (for example, as an embedded derivative), just outside of the revenue accounting rules.
• For example, if a sports fan purchases a full-season suite for one bitcoin today, then the team may need to consider:
o What value of bitcoin will drive the revenue recognized?
o How is the volatility of the price of bitcoin accounted for?
o How should this be presented on the financial statements, and what disclosures are required or needed?
Accounting for crypto expenditures
When crypto is used as payment for expenses, the single transaction has two legs: (1) the sale of the crypto and (2) the receipt of a service. That second item, in turn, is accounted for as the noncash consideration on the sale of the crypto:
• The company will have to assess whether the other party is a “customer” per the accounting rules or a “noncustomer,” which will determine the financial statement line item presentation.
• The valuation of the crypto and pricing of the transaction are set at the same time (the time at which the contract is entered into or otherwise becomes legally enforceable).
• The company will need to consider valuation of the transaction price and whether that should be based on the value of the service received or the value of the crypto asset sold. Some valuation concepts, such as fair value, even have their own accounting standard and rules. They may need to be applied and may require unique considerations when applied to crypto assets.
• If the company is exposed to price variability in the crypto asset after establishing the price or value of the transaction, this exposure may require separate accounting. Oftentimes, that may come in the form of derivatives.
• If the crypto asset used in the transaction is recorded on the books at a value different from the value for which the company was able to transact that crypto asset, that may result in realization of the value differential.
By using crypto for payments, the company is now deploying noncash assets in a cash-like manner. What does that imply?
• The accounting department will need to flag for the tax department the realization of any gain or loss precipitated by the use of the crypto.
• The company will need to adjust its cash-flow statement for the noncash payments and provide additional disclosures to explain the accounting for the crypto transactions.
Financial statement disclosure:
Use of crypto in the business is a new frontier for many companies. It may affect the company’s financial results for many of the reasons discussed above. A company using crypto in a “hands-on” fashion should carefully consider:
• The required disclosures for the relevant accounting principles that were applied for the transactions
• Whether the required disclosures are sufficient and adequate. Do they paint a clear picture of the company’s strategy regarding its use of crypto for users of the financial statements? Can a reader of the financial statements piece together the information to understand the use of crypto in the business?
• How the use of crypto affects the company’s cash flows and operations
• Related risks to the company’s business. That includes the impact crypto has, or may have, on the company’s current and future financial results, as well as the related risks to which the company may be exposed as a result of using crypto assets in the business.
Integrating Treasury and Operations
What kind of networks might a company need?
Treasury and Operations will typically each serve as a cornerstone to the daily use and management of crypto in the organization. If you consider the types of payments the company makes, the customers, vendors, and suppliers that you deal with on a repeat basis, and the size of the transactions, as well as the need for speed, then payment networks using crypto may be a solution for Treasury and Operations.
Consider this example: A manufacturer relies on component parts sourced from various countries. It may have contract manufacturing with third parties for some components, its own assembly in another location, and a mix of company and third-party distribution channels throughout the world. Once the manufacturer creates a network and invites the third parties to join, the costs of transacting business are very reasonable. And along the way, participants, depending on the network(s) they participate in, can benefit from:
• Linking payment to delivery of goods reducing counterparty credit risk
• Reduced Days Sales Outstanding (DSO) thereby supporting enhanced margin and working capital
• Guaranteed payment delivery—all in real time—for improved transparency in forecasting and reporting
Enhanced working capital and liquidity management
One of the recurring operational challenges that all organizations face is managing their capital. That challenge is encompassed in three questions:
1. What money does the organization have?
2. Where is it?
3. Does it have access to it?
Using crypto can help solve some challenges of working capital management—notably that of “What available operational cash does the business have, and where is it?” When a company commits to a transaction with crypto, the transaction is locked until settled, typically in minutes. Since the transaction is locked, the company cannot double-spend, thereby creating an operational awareness about available cash.
With rigorous risk and controls management, the use of crypto can enhance the speed and transparency with which transfers (and business) are conducted. In effect, the use of crypto is like looking at a detailed radar screen. All the planes and their locations are readily visible, and the screen provides controllers and comptrollers with a complete picture.
Identify your company’s path and develop a road map
Crypto is viewed by some as a critical part of the evolution of finance. When your company chooses to engage with crypto, that triggers changes across the organization, as well as changes in mindset.
As with any technology change or upgrade, there is a need for an implementation plan. That plan should include, but is not limited to, these types of questions:
What is the overall strategy?
What are the short-term and long-term objectives?
What partners, internal and external, does the company need to involve? Can leaders identify effective champions for the effort across the enterprise, in all relevant departments?
Will the decisions and actions the company takes now allow for flexibility and scaling of efforts later?
How can the company integrate the security needs of operating in the digital asset ecosystem with existing security and cyber efforts in the company?
How does the company implement the introduction of crypto? Does it begin with a payments-only, “hands-off” approach? Or does it engage “hands-on”?
What resources will the company need above and beyond those it currently has? What new expertise might it need?
What will the implementation road map look like?
How will the company evaluate progress as it implements? Does the company have the necessary processes in place to monitor the execution of transactions and vendor performance?
What does the final state before launch look like?
This can be a complex endeavor. That’s why, before engaging in a more robust launch, some companies have chosen to pilot the use of crypto just as they would pilot a new technology. One type of pilot a number have chosen is an internal intradepartmental pilot. It’s based in Treasury, since Treasury is typically responsible for internal funding of the company and its departments and subsidiaries. The pilot can begin with the purchase of some crypto, after which Treasury uses it for several peripheral payments and follows the thread as the crypto is paid out, received, and revalued.
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