Yesterday KPMG Canada said it had invested some of its corporate treasury in cryptocurrencies, including Bitcoin and Ethereum, as well as carbon offsets to comply with ESG commitments.
As a site focused on business use cases rather than investors, we don’t cover much about cryptocurrency investment. But a big four accounting firm allocating treasury funds to cryptocurrency is undoubtedly newsworthy. However, the announcement also sends a message to cash-rich cryptocurrency firms that KPMG is crypto-friendly and should be considered for compliance advisory work. Evenso, this first step is a very important one.
“This investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix,” said Benjie Thomas, Canadian Managing Partner, Advisory Services.
Notably, the quote came from the head of advisory services. The consultants set up a special governance committee before it decided to go ahead, and its process would be a good learning curve if it were to advise others.
One thing worth highlighting: do people involved in the governance decision have crypto investments themselves? And how significant are they? Some announcements such as this one have the potential to move the needle on crypto valuations. So there’s a strong ethical argument that people who might personally substantially benefit from the decision should recuse themselves from decision making.
Of the big four consultants, EY is the standout for the crypto crowd in terms of market positioning. Partner Paul Brody promoted the use of public blockchain – and Ethereum alone – when it was still considered inappropriate. PwC would probably come second. Its Hong Kong partner Henri Arslanian is a high profile crypto personality.
Is the investment material?
In accounting circle’s, ‘materiality’ is a common term bandied about. In other words, if 1% or 5% of the treasury is invested in crypto, it’s not material. If the bottom falls out of the market (again), then it would be unfortunate but not a considerable risk. So the real question is whether KPMG’s crypto investment is material.
We asked what proportion of the firm’s treasury has been allocated. A spokesperson responded, “We’re a private company so unfortunately we cannot disclose the amount or the allocation breakdown. However, what we can say is that we are taking a prudent approach to investing in crypto assets, and we will continue to do so in the future. For our treasury investment, we have only considered bitcoin and Ethereum.”
Even for Block (formerly Square), which invested $220 million of its treasury in Bitcoin in late 2020 and early 2021, the proportion represented 5% of its available treasury. Block provides Bitcoin services, and CEO Jack Dorsey is a high profile Bitcoin supporter.
In March last year, we spoke to some corporate treasurers and the UK’s Association of Corporate Treasurers (ACT) about the appetite for crypto investment, specifically as a part of treasury. The response was that the role of the treasurer is not the same as that of a hedge manager. Security and maintenance of value are paramount. Risk appetite also depends on whether a company is flush with cash.
In the last ten months, a lot has changed. For example, the ACT has hosted events around cryptocurrency. And the stigma of cryptocurrency has softened, helped by the flood of money flowing in from venture capital investors.
Stablecoins for corporate treasury?
A more obvious route for corporate treasurers is to put some money in stablecoins. By doing so, it avoids the volatility of other cryptocurrencies. The upside is the potential to earn significantly higher returns than those offered by banks or other markets.
However, there is still exposure to cryptocurrency volatility. Most high-yielding stablecoin products lend out the money against cryptocurrency collateral. There are always risks that the collateral can’t be liquidated fast enough given the volatility.
Corporate credit card company Ramp, which raised $300 million at a $3.9 billion valuation last August, has invested some of its cash in stablecoins, specifically Circle Yield. And its treasurer shared the analysis. At the time, it managed to get almost 7% in short-term yields. Currently, the one-month maturity return is just under 4.65% (annualized).
However, most treasurers recognize that higher rates are because of additional risks. Apart from the collateral risk, there are also smart contract and custody risks. Ramp is not directly using lending protocols such as Aave or Compound. But despite being regarded as low risk, Compound released a flawed update to its smart contract last year. Fortunately, the impact primarily impacted Compound token holders rather than funds. But who knows next time.
While this article may sound skeptical about treasurers investing in cryptocurrency, provided the company has excess cash and the risk appetite, an immaterial allocation might make sense for some. That’s if the risks are fully appreciated.
And despite suspicions that KPMG’s investment is motivated by the promotional value, it’s worth remembering the Chinese proverb. “A journey of a thousand miles begins with a single step.”
Update: added response from KPMG