Is Bitcoin Too Volatile for Treasury Management
There has been an influx of large, recognizable enterprises adding bitcoin to their corporate balance sheets. MicroStrategy, Square and Tesla have all purchased bitcoin for treasury management initiatives. While bitcoin’s allure as a store of value, due to its climbing price and decentralized nature, is convincing, we are perplexed by the attraction from traditional risk averse treasury management financiers.
The pandemic and its effects have prompted institutions to reconsider their investment and risk management policies. There are many compelling reasons for institutions to embrace digital assets, such as corporate initiatives to adopt modern technology and hedging against inflation during unprecedented times. Nonetheless, the recent interest seems to be on bitcoin specifically, rather than blockchain technology or any of the other thousands of digital assets available. Bitcoin is a historically volatile and speculative investment, which directly conflicts with treasury management objectives.
A treasury department’s primary functions are risk management and preservation of capital.
There are many factors to consider when establishing best practices to manage risk and enhance returns; including short and long-term liquidity needs, changes in interest rates, the macro environment and various others. With the weakening value of the US dollar, treasurers have started to look outside their normal strategies. Extraordinary situations call for extraordinary responses.
Why are corporate treasury departments turning towards Digital Assets?
- Simple transferability to enhance internal operations and performance
- Blockchain’s faster, cheaper, and safer technology solution
- Potential higher yields
It is understandable that treasurers are looking towards alternative solutions, especially with the enticements above. However, the digital assets market is much greater than just bitcoin. Corporate treasurers should familiarize themselves with safer financial products, such as digital securities. Digital securities are regulated financial instruments that represent an underlying asset, such as stocks, bonds and funds with the added benefits of blockchain technology enabling peer to peer transfers, instant settlement and lower transaction costs.
When looking for safer and more secure financial structures during the business assessment and investment due diligence process, one must weigh a variety of components. Registered financial products can be more attractive than their unregistered counterparts, as many include additive protections, such as mandatory AML/KYC compliance and the use of independent identity attestation parties. One potentially ideal digital security for corporate treasurers is one that is overseen by a regulatory body that requires independent auditing, custody of assets in a trust, and transparent financial reporting.
It’s safe to say that taking a step by step, composed approach towards business digitization can be expected to align best with the treasurer's risk appetite. Treasurers are concerned with the implementation of a digital asset, and have to amend existing workflows and backend technologies to account for its intricacies. For example, holding digital assets requires the use of digital wallets, specialized liquidity providers, and different pricing feeds, compared to traditional financial asset classes. Starting with an easily digestible digital asset, like a low volatility token, can help ease the transitional burden of accounting, operational, and reporting configuration challenges, while minimizing monetary apprehension.
An opportune first step to addressing a treasurer’s workflow and safe-keeping responsibilities, is a familiar financial structure. This approach can help remove some of the initial internal approvals and reluctance burden and treasurers can begin to adapt a modern technology into their existing operations. One existing opportunity in the digital assets market for treasurers is the Arca U.S. Treasury Fund, a closed-end, ‘40 Act fund that invests in a portfolio consisting primarily of U.S. Treasuries, that issues its shares as a digital security, ArCoin. The Fund utilizes an existing regulatory structure while leveraging blockchain technology to shorten settlement timelines, enable 24/7/365 peer-peer transferability, and remove intermediaries.
Corporations want to exploit blockchain technology and digital assets to maximize their bottomline, but the adoption process is undoubtedly long and arduous. Fortunately, there are an assortment of digital assets designed to meet a variety of investors’ needs. The digital asset industry is just ramping up, so the time to start evaluating the most appropriate means of investing is now. Finding the right digital asset, for the right purpose, at the right time is imperative.
An investor should carefully consider the investment objectives, risks, charges, and expenses of the Arca U.S. Treasury Fund before investing. This and other information is available in the Fund’s prospectus, which should be reviewed carefully prior to investing. To obtain a prospectus, please call 1-800-445-3148.
The Funds Annual Operating Expense Ratio, as reflected in the current prospectus is 3.22%, however Management has agreed to an expense cap of .75% through an expense limitation agreement for the first year after effectiveness of the Fund's registration statement. For more details relating to the fund’s expenses, please review the prospectus.
No assurance can be given that the Fund will achieve its investment objective, and investment results may vary substantially over time and from period to period.
An investment in the Fund involves risk including loss of principal. An investment in the Fund is suitable only for investors who can bear the risks associated with limited liquidity in the shares and the uncertainty of emerging technologies, and should be viewed as a long-term investment.
Other risks specifically associated with the Arca U.S. Treasury Fund are detailed in the prospectus and include no history of operations risk, conflict of interest risk, interval fund risk, no minimum amount of proceeds risk, fund closure risk, liquidity risk, tax related risks, credit and non-payment risk, interest rate risk, portfolio management risk, market risk, call risk, valuation risk and issuer risk.
The Arca U.S. Treasury Fund will be one of the first registered funds to offer digital securities and there are additional risks associated with this feature of the fund, including regulatory risk, liquidity risk, emerging technology risk, operational and technology risk, and risks specifically associated with the Ethereum blockchain. There is the risk that management may be unable to successfully use blockchain technology to validate ownership and transfer ArCoin.
The Fund is a closed-end fund operating as an interval fund. Among other things, interval funds differ from open-end management investment companies (commonly referred to as mutual funds) in that they do not generally redeem their shares at the option of the shareholder. And unlike open-end funds, closed-end funds and interval funds generally stay fully invested in securities consistent with the fund’s investment objectives and policies.
The shares will not be listed for trading on any national securities exchange nor made available for trading through a NMS. The shares are also not available for secondary trading in any venue, such as a public decentralized or centralized electronic exchange platform. Although the shares may be transferred in peer-to-peer transactions, the availability of counterparties to such transactions is limited to other shareholders or other eligible purchasers. There may be relatively few investors to whom ArCoins can be transferred in a peer-to-peer transaction, and thus there may be limited to no liquidity in ArCoins. In addition, if you sell your ArCoins through a peer-to-peer transaction, that transaction may not occur at NAV, as such transactions are individually negotiated by the Fund's shareholders in the peer-to-peer market.
For details regarding all of the risks described above, please review the prospectus.
Arca Capital Management, LLC “Arca” serves as adviser to the Arca US Treasury Fund, distributed by UMB Distribution Services, Member FINRA/SIPC. Arca and UMB are not affiliated.