Businesses And Crypto: Finding The Value And Managing The Big Risks

During a demonstration at the Hong Kong Digital Asset Exchange Ltd. digital currency trading store in Hong Kong, China, on Thursday, June 24, 2021, an employee picks the “Buy Bitcoin” option on a cryptocurrency automated teller machine (ATM)… [+]. Hong Kong Digital Asset Exchange is a cryptocurrency exchange that is the first in Hong Kong to integrate online and physical trading. (C) 2021, Paul Yeung/Bloomberg, photographer Bloomberg Finance LP is a financial services firm based in New York
Erik Sherman contributed to this article.
The good news for crypto currency is that El Salvador has opted to recognize it as legal tender, and the Basel Committee on Banking Supervision has proposed that banks be allowed to handle digital assets such as Bitcoin.
The bad news for businesses? Multiple. When something is legal tender, you need to know how to deal with it. The banking proposal demonstrates how volatile cryptocurrency values are; a major crypto exchange is being hammered by countries refusing to allow it entry; and, as Tesla may well demonstrate in the coming days, when a company holds crypto and the price drops, it can result in a balance sheet hit, even if the coin rises in value.
Cryptocurrencies are a fascinating and rapidly evolving nexus of finance and technology. Corporations, however, must respect and manage risk even when investigating opportunities. With Bitcoin, Ethereum, and all the other coins and exchanges, there’s plenty of it to go around.
“It’s the difference between fraud risk and structural risk,” says Tal Lifshitz, co-chair of Kozyak Tropin & Throckmorton’s cryptocurrency, digital asset, and blockchain group. “Obviously, a business owner who is going to start trading in crypto must be fully aware of the inherent volatility and must decide whether to hold it or promptly liquidate it.”
Bitcoin is an excellent example. Bitcoin values ranged between $200 and $300 for a single coin in 2015, according to statistics from crypto market Coinbase. It had risen to $64,899 on April 13, 2021. On June 22, it went below $30,000 in a dramatic but fleeting increase. It’s almost at $35,000 as of 1:30 p.m. on June 28. What will happen in the following hour, day, week, or month? What are the chances?
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Individual investors could switch between champaign and antacids on a regular basis. Corporations, on the other hand, follow rules that they did not create. If someone wanted to pay with Bitcoin in El Salvador, the firm couldn’t say no. Because the cryptocurrency is considered official legal tender, it must be accepted.

LA LIBERTAD, EL SALVADOR – JUNE 16: A woman in Chiltuipan, El Salvador, holds up a phone with a bitcoin wallet app on June 16, 2021. Around 500 families encourage the use of the cryptocurrency to aid the economy of a town with socioeconomic concerns, and Playa El Zonte has been dubbed the “Bitcoin Capital.” (Photo courtesy of APHOTOGRAFIA/Getty Images/Camillo Freedman)
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The corporation might now convert its Bitcoin assets into a national fiat currency, such as the US dollar in El Salvador’s case. But what happens if the value of the asset plummets?
Cryptocurrencies are classified as intangible assets under accounting regulations. At the time of acquisition, a corporation records the value on its balance sheet. However, if an impairment occurs, such as a considerable reduction in value, the losses are recorded on the balance sheet. However, as BDO International, an audit, advice, and tax business, and other accounting companies have pointed out, those losses are currently irreversible. If the price ultimately rises, the asset’s worth remains at that low position until the corporation sells it.
Tesla, which bought a large amount of Bitcoin, may be obliged to write down the value because it kept the assets during the current drop.
While El Salvador has accepted the usage of Bitcoin, other governments with larger influence in international banking have resisted bitcoin, either directly or indirectly through exchange replies.
Binance, the world’s largest cryptocurrency exchange by volume, has been ignored. On June 25, 2021, Japan’s Financial Services Agency issued a warning to the company, as it had done in 2018, that it was not registered to do business in the country. The Financial Conduct Authority of the United Kingdom issued a warning to the company’s subsidiary in the region on June 26 “activities that are regulated “Other exchanges exist, but such warnings to a major player signal that the regulatory road ahead is not yet clear. How can you act in accordance with the law while the regulations are still being developed and are unknown?
“You don’t,” says Felix Shipkevich, a principal at Shipkevich Attorneys at Law and a fintech and digital currency expert. “I like the word messy, but I think murky is a better word. It’s as though we’re attempting to get 20/20 eyesight but haven’t quite gotten there yet.”

JUNE 04, MIAMI, FLORIDA: Jack Dorsey is the co-founder, CEO, and Chairman of Twitter, as well as the co-founder and CEO of… [+] Square’s CEO on stage at the Bitcoin 2021 Convention, a crypto-currency conference hosted on June 4, 2021 in Miami, Florida at the Mana Convention Center in Wynwood. (Photo courtesy of Getty Images/Joe Raedle)
courtesy of Getty Images
Under the proposed Basel rule, banks, for example, would be permitted to hold Bitcoin assets. However, the fine print would make it impossible, with reserve regulations requiring roughly one actual dollar to be kept aside for every dollar in Bitcoin value.
The rule contributes to a chicken-and-egg situation. “There will always be regulatory ambiguity until we see [large banks] enable their customers to store crypto,” Shipkevich argues.
Companies must also be confident in the security of their crypto assets, which necessitates a thorough understanding of the digital wallets in which they are stored. “How do we know it won’t be in their wallet one day if those crypto assets aren’t safeguarded, if they’re in an uncontrolled entity?” Cryptocurrency theft has occurred on several occasions.
Beyond basic security, understanding the so-called smart contracts that can be connected to cryptocurrency transactions and conduct actions based on events and conditions is required.
The business should make certain that the contract is open to the public. Contracts, on the other hand, are programs. They must be open to the public, with “the original, hopefully-commented source code able to be examined by anyone,” according to James Cropcho, co-founder and CTO of Flipkick, a crypto service provider for artists. “There are smart contracts where you literally have no idea what the code is.”
When the code is present, someone must be able to decipher it, which necessitates seeking assistance. But, as Cropcho points out, there’s another issue. “There is no judge and no courts in the smart contract area,” he argues. “It would take a Herculean effort to exaggerate how significant a difference this makes in practice. This is why auditors must have a significant role, even if the framework’s track record has been less than stellar.”
Cryptocurrencies have brought in millions of dollars for businesses. However, some people have lost a lot of money. Executives who have their eyes on the cash prize should look down every now and then to avoid the mud pits.
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