9: STABLECOINS FOR TREASURY
Stablecoins are not a new phenomenon.
Tether (USDT) was the first Stablecoin launched in 2014 and was subsequently followed by DAO, Terra and Circle (USDC) and the entire idea behind this new form of cryptocurrency is that it is pegged to a traditional asset like the US dollar, Euro or even Gold and designed for everyday use and therefore a form of currency that’s devoid of the type of volatility that Bitcoin, Ethereum and others possess.
Recently, Circle’s IPO gathered a lot of newly found buzz, especially since the company was attempted to be bought by Ripple (maker of XRP-USD) for Circle being regulatory first and fiat-backed.
Circle’s IPO was a huge success that was followed by increased adoption by some large and well known companies, and a great first earnings release since going public. The stock price has recently fallen from highs as the hype seems to have faded at least momentarily.
Types of Stablecoins
Fiat backed isn’t the only type of Stablecoin.
Here are some of the types and their key characteristics:
Desired attributes of Stablecoins:
As demonstrated above, not all Stablecoins are created equal. Some are preferred over others for the following reasons:
Collateralized by non-risky assets: By design, if a Stablecoin is backed by a non-volatile crypto and these collateralized assets are easily verifiable, that Stablecoin should be most often desired than not.
Regulatory-first: Existing compliance with regulations and proactive compliance with regulators of the stablecoin issuer helps build confidence in buyers and sellers of the stablecoin.
Liquidity: One of the uses of a stablecoin is to be able to be converted to a cryptocurrency (this is covered in more detail later in this blog), so large market depth of the stablecoin is highly desirable.
Access: Presence on wallets world-wide and easy access to both retailers and institutions is another desired attribute. Due to Stablecoins being used in cross border payment, wide access is top of mind for the ecosystem.
Bringing this back to Corporate Finance ….
Over the past many years, a few non-financial companies have used their cash to purchase Bitcoin and hold the asset as an alternative to fiat for all the benefits of Bitcoin that are centered around being a store of value and a mode of payment (acceptance for the company). In other words, these companies do not rely on Bitcoin for their operating income, nor do they offer a platform for their customers to buy and sell Bitcoin or mine Bitcoin like Mara Holding ($MARA).
Of those that fall into this category, Strategy ($MSTR) leads the pack that also contains notable companies like Tesla ($TSLA) and Gamestop (GME).
Other companies have also been adopting this strategy. Figma (FIG) that recently released their first earnings since going public recently, also disclosed Bitcoin ownership.
And this has prompted the quintessential question:
What does the modern day Balance Sheet look like?
No company actively holds or plans to forever simply hold cash on their balance sheet. Most companies purchase and sell marketable securities through a broker that helps them grow their surplus cash.
Stablecoins could be that treasury strategy addition, for the fact that the company can actively purchase and sell other crypto assets for a much smaller fee (once already in a wallet like Coinbase).
Is it advisable to simply replace cash with Stablecoins?
If a company is simply replacing their unrestricted cash balance with Stablecoins, then there is no difference to holding fiat.
In fact it is probably worse than holding fiat since the business sacrifices any interest income that could have potentially been made.
If instead, the stablecoin is deposited on a DeFi platform, it allows the business to borrow, lend and exchange cryptocurrency without intermediaries (banks, etc.). Certain DeFi lending platforms pay the depositor a stablecoin yield.
What further optimizes the use of stablecoins is the potential to gain (much) cheaper access to volatile crypto assets.
What affects DeFi yield?
The yield is determined by a range of factors:
Borrowing demand for Stablecoins
Supply of stablecoins: This again depends on the type of stablecoin but a USDC or USDT is minted when a depositor wires USD to the stablecoin issuer and burned when supply is redeemed.
Type of stablecoin that dictates the yield e.g. USDC/USDT carry lower yield, others command a higher yield due to their riskiness
DeFi looping: If stablecoins are deposited into the same pool, this creates layering and can artificially boost yields.
Token incentives: Higher incentives can boost yields.
Market Volatility: Periods of market volatility are known to boost yields for stablecoins.
Macro rates: As many other dependent rates, stablecoin rates are not detached from the macro picture.
Peg rate stability: You would have noticed peg rates slightly above or below $1. A rate above $1 drives yields higher as more people are interested in borrowing the Stablecoin to sell and vice-a-versa.
Treasury strategy that includes Stablecoins
The question of ‘how many’ to hold in Stablecoins is one that requires a series of considerations.
Some of which are:
1. What percentage of cash is required to fund operations
There is no standard percentage across the board and one that is a result of the company’s operating needs, risk management, financing strategy and external conditions. The % of revenue a company holds as cash balance is also not correlated with the size of the company (market cap). As a % of revenue, a mega cap like Apple holds ~40% of in cash & equivalents, a large cap like AMD holds 67%, a smaller cap like DELL holds 26% while a small cap like SMCI holds 90%
2. What is the amount to be held in marketable securities
Stablecoins is still a relatively new area and therefore it is not recommended for the entire pool of funds that would have been otherwise invested on the money market to be invested in stablecoins.
Companies are used to laddering money market funds as well so a strategy that adds stablecoin investments to these ladders might make more financial sense.
3. Yield offered by the DeFi platform
As mentioned above and if a company chooses to earn yield or use Stablecoins for the purposes of borrowing or developing a strong perspective on the forward yields is essential.
Operational uses of Stablecoins
1. Cross border payment
Due to the fact that there are no banks involved in the transfer of a Stablecoin from the sender to the receiver, international transfers of stablecoins are extremely cost effective (nil cost if the Stablecoin stays in USD) and significantly cheaper over standard bank transfers that are known to run at 2-3% for large transfers to as high as 7-10% for large transfers. This is one of the primary reasons that Stablecoins have gained a lot of popularity. This is true even for companies that have a practice of transferring funds from a bank account in one country to another.
2. Supplier/vendor payment
For so long as the supplier or vendor is set up to accept stablecoins, this would constitute another method of cheap payment.
3. Liquidity management
Currencies that experience high volatility could benefit from having companies use Stablecoins as a store of value in USD due to the greenback’s relatively stable nature.
4. Investing in other cryptocurrencies
Holding Stablecoins in the same wallet as other cryptocurrencies is one of the biggest benefits in favor of the former crypto versus transferring in fiat as a fiat transfer would attract more fees.
This is an article that is written based on research and the company’s (The Finance Pro’s) experience in the subject area.
It is strongly recommended to design a Treasury strategy that is customized to your organization and not simply go off this article or any such article on this topic.
