The corporate treasury often sits within the finance department. It manages cash and ensures there is enough money to pay employees. It also parks extra funds in safe investments. These investments include US Treasury bills or stocks.

However, the rise of inflation and the digital revolution have forced a transformation.

Now, there are digital asset treasuries (DATs). Many firms are now looking at what digital asset treasures are as they begin the strategic process of converting idle cash into Bitcoin (BTC), Ether (ETH), or stablecoins.

Why are corporations adopting these strategies, and what are the benefits of digital asset treasures for long-term growth?

Catching up to the digital revolution

At its core, a treasury is a company’s fortress of capital. With firms now increasingly eyeing crypto, the DAT is simply the inclusion of blockchain-based assets within that fortress.

When a company like Strategy (previously MicroStrategy) or Tesla decides to hold Bitcoin, they are not thinking like retail crypto traders. Their vision goes beyond simple buying and selling to generate profits. 

Instead, they do a risk assessment of the capital allocation. In other words, they decide that holding digital assets can be beneficial for the long-term growth of the company instead of simply holding on to fiat or other traditional assets.

But isn’t crypto volatile and disrupting corporate value?

Yes, cryptocurrencies are infamous for their volatility. However, the decision to build a DAT is not just about being “cool” or jumping on the bandwagon and chasing the latest hype. 

There are several reasons that firms prefer having digital assets in their books: 

Certain cryptocurrencies act like a hedge

Depending on the nature of the cryptocurrency, some can help firms hedge against inflation. 

Bitcoin, for example, is deflationary in nature. With a hard cap of 21 million coins, minting more is unlikely given its level of decentralization. 

Governments, however, can print more currency, leading to national fiat currencies like dollar or euro devalues over time. By learning how digital asset treasures work as a deflationary hedge, corporations can effectively protect their capital from fiat devaluation.

By moving a percentage of the balance sheet into Bitcoin (or, for that matter, any other crypto the firm believes can rise in value), the firm creates a hedge against fiat inflation.

With inflation, the value of fiat goes down. But assets like Bitcoin have shown an inverse correlation with traditional fiat (if the market condition isn’t causing a crypto slump), keeping the company’s total wealth stable.

The asymmetric upside can be lucrative

Where there is a hedge possibility with crypto assets, there is volatility. This means that there is always a chance of held digital assets going up in value, but crashing also, and dragging the firm’s valuation down.

The strategy behind digital asset treasures focuses on asymmetric upside, where a small capital allocation can lead to significant valuation growth.

For example, a firm invests 5% of its cash into crypto. On the offside that its preferred digital asset crashes to zero, the firm only loses 5% of its capital. But if it doubles, or even triples, this significantly boosts the company’s value.

If the crypto does rise in value, not only does it increase the firm’s valuation, but it can also make its stock more attractive to investors, bolstering its image in the investment market.

Staking and other DeFi tools can generate yield

Unless the fiat is invested in profitable ventures, it is just sitting idle in a bank. Financial institutions like banks do give interest, but the crypto world can offer much more.

The corporations always have the option to use their crypto in reputable DeFi protocols and lend it out. 

With the middleman, like a bank, out of the equation, lending this way can generate a higher interest percentage. The interest is usually paid out in the relevant crypto, increasing the firm’s holdings.

If the held crypto’s network uses a proof-of-stake (PoS) model, the firm can also stake its assets to secure the network and be rewarded with newly minted tokens.

How DATs work with crypto in their balance sheets

A balance sheet is a financial statement that shows a company’s health. It shows three major things: what the firm owns (the assets), what it owes to others (liabilities), and what the shareholders own in the company (equity).

Obviously, any crypto held in the DAT will come under the assets section. But how they are presented is important. Firms are bound by the Financial Accounting Standards Board (FASB) and have to follow the set rules. This independent, non-profit organization establishes the standard financial accounting and reporting practices, and US firms follow it.

Cryptocurrencies were treated as intangible assets in the past

Before December 2023, FASB classified crypto under the same category as intangible assets.

Intangible assets are those that do not have a physical existence and are a part of the firm that builds its value. These include trademarks, logos, patents, and even goodwill.

But that is where most DATs faced an issue. Intangible goods’ initial value back then was set at the purchasing rate. Firms were forced to show losses if the intangible goods’ value dropped. However, it did not allow corporations to recognize the increased value in their books.

The problem? Imagine if a company bought one Bitcoin at $80,000. During the first accounting cycle, it saw BTC dropping to $70,000, and then shooting up to $100,000 in the next fiscal year.

In the first year, the firm had to show a loss of $10,000 (from $80,000 to $70,000) in its books. While it did help show a true picture of the firm’s financial standing (and even helped in lowering applicable taxes), the company would face an issue next year when Bitcoin shoots to $100,000.

The firm would be forced to record its crypto holding at $70,000, not $100,000. This made companies’ assets worth less in books, even if their worth had jumped.

The fair value updated standard

With new updates by FASB in December 2023, the accounting standard allowed firms to note the market value of their crypto holdings. This FASB Fair Value ruling lets DATs present a more accurate picture of their financial standings in crypto.

Now, if a company’s crypto stash grows in value, that growth is recorded as unrealized gains. These are paper profits from assets that can be shown on a financial statement, but since the assets are not sold, these profits are not locked in.

This has made corporate balance sheets much more transparent and has allowed them to finally show their wins to their shareholders.

DATs can go beyond simple crypto holdings

Holding crypto by corporations can be more than just taking advantage of the potentially increased valuation (should the assets’ price rise) or just to show they are progressive.

Financial settlements are faster

Blockchain networks are faster than the banking system, making them an excellent choice as a mode of payment. Depending on the chain, it can take from a few minutes to less than a second to make a payment.

Blockchain fees are lower

By using a reputable, but efficient blockchain, corporations can transfer cryptocurrencies for pennies (sometimes even less). This way, firms can save significant transaction fees when compared to what banks charge.

But that being said, there are some drawbacks for firms holding (or looking into holding) cryptocurrencies through DATs

Volatility risk is always there

If a firm increases its exposure to significant crypto holdings, it may have a hard time during periods of volatility or a market crash. In extreme cases, it might not have many valuable assets left to cover its operational costs, or even to payout investors.

Auditors charge higher when it comes to DATs

Third-party auditing firms usually charge higher if corporations hold cryptocurrencies. Auditing firms require personnel with a deeper and more complex knowledge of the digital assets and blockchain, driving up their costs.

Is it worth it to have a DAT?

Crypto assets, a few years shy of 2 decades of existence, are still a novel and emerging class. While firms and regulatory bodies are still grappling with the changed environment and the unique nature of crypto assets, the appeal (both potentially financial and non-financial) has firms setting up their DATs.

But as reporting standards and regulations continue to evolve, the number of firms with DATs is increasing, signalling a shift towards firms interested in holding digital assets for their financial health.

FAQs

What are digital asset treasuries?

Digital asset treasuries refer to the strategic inclusion of blockchain-based assets like Bitcoin and Ethereum within a corporate treasury. Instead of holding only traditional fiat or bonds, a company allocates a portion of its capital to digital assets to modernize its balance sheet and pursue long-term growth.

How do digital asset treasuries work as an inflation hedge?

Many corporations use digital asset treasuries to protect against the devaluation of fiat currency. Since assets like Bitcoin have a fixed supply, they can serve as a deflationary hedge. When governments print more money and fiat value drops, these digital assets may maintain or increase their relative value for the firm.

Can digital asset treasuries generate passive income for a firm?

Yes, corporations can use DeFi protocols and staking models to generate yield on their holdings. By lending out assets or participating in proof-of-stake networks, a firm can earn rewards and interest. This allows idle capital to grow through newly minted tokens or lending fees without relying on traditional banks.

What are the main risks associated with digital asset treasuries?

The primary risks include market volatility and increased operational costs. If a firm overextends its crypto exposure, a market crash could impact its ability to cover operational expenses. Additionally, auditing firms often charge higher fees for DATs because they require specialized personnel with deep blockchain knowledge.