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Bitcoins: should CFOs be willing to take the risk?

You are the CFO of a public company and your CEO suggests you invest in Bitcoins, as their value has gone up a lot over the past few weeks, and he thinks that will continue. He says it will make the bottom line on the income statement look stronger. What should you do?

You’ll first have to do a little explaining. Bitcoins are a very new and highly volatile virtual currency, and should be treated with caution, by both personal investors and companies that decide to invest in them or incorporate them into their payment systems. Here’s an example of their volatility: In early December 2013, Bitcoins were trading at $421 per coin, and just a month later, they were trading at well over $1,000 a coin. So if you had bought some in December, you would have looked like a hero in early January. Unfortunately, if you had bought some in November 2013, you would actually be showing a loss in January, as they were trading at $1,100 back then. You would have been looking really bad when the price dropped to $421 in December. But there’s more of an issue here than how you look.

Bitcoins are an unregulated currency in the U.S. at this time. If the U.S. ever decides to regulate them, expect the price to drop significantly when that regulation is announced. China’s decision to not allow conversion of Bitcoins into local Chinese currency back in December was one of the big reasons for the drop in their price. Will the U.S. decide to regulate? Hard to say, but Bitcoin is associated with money laundering, and that in itself may invite scrutiny of your company should you trade in them, and it may also be the driving force to regulation. In addition, as Bitcoins are not regulated, there is and will continue to be no protection to consumers who buy them and lose money on them, and of course they have no intrinsic value. No government wants its consumers to suffer losses, especially when it’s avoidable. My guess is that at some point soon there will be regulation.

In the meantime, some companies, such as Zynga, are starting to accept Bitcoins as a form of payment. However, most companies are still not having anything to do with them, because of the risk involved. I don’t know what Zynga or the other companies are doing with the Bitcoins when they get receipt of them, but I suspect they are converting the Bitcoins to established currencies as fast as they can, so they can minimize their risk. If they don’t convert, they are holding the Bitcoins as an investment. That raises a whole slew of issues, including whether they can even do it under their investment policy. Nearly all public companies have investment policies that restrict the type of investment they hold to, say, AAA-level investments. I am pretty sure Bitcoins fall outside that classification, so companies would be barred from holding them without changing their policy. It would be a brave board of directors that changed that policy given the downside risk.

So, back to the original question of what should you do? This is a classic case of risk assessment, and I personally suggest you proceed with a tremendous amount of caution. First, you should check your investment policy and see if it allows for such holdings. If it doesn’t, there will need to be a discussion at the board level about that policy and what the company is trying to achieve under its policy. If the policy doesn’t allow for investment and the board wants to invest in them, the board will need to adopt changes. Second, if you do decide to invest and the policy allows for it, consider the downside risk. If you are not willing as a company to stomach the downside, do not invest. If you and your company are tolerant of some risk, limit your investment to that level of risk.

You as the CFO are responsible for the financial actions of the company, and you will get all the attention, whether Bitcoins go sour or they actually soar. I remember a similar situation with mortgage-backed securities in the last decade. Back then, I was a CFO of a public company with $150 million in investments, and investors were screaming at me to buy them because they had great returns. Our returns were 4% whereas others had double-digit returns. I did not authorize buying them, as we had a very cautious investment policy and they were outside the scope, plus their nature just made me nervous and I was not going to recommend we change our policy. When their value crashed in 2008, there was a tremendous backlash on CFOs and companies that had held them. My 4% return suddenly looked very good, and my board was very happy with my actions. Unfortunately, many companies and CFOs paid the ultimate price. You don’t want to be the one in that situation.

So act with caution, and remember that it’s not all about making the income statement’s bottom line look good. It’s actually more about making sure the bottom line does not look bad!

For more information about the many aspects companies need to consider when contemplating the use of Bitcoins, see Compliance Week’s Virtual Currencies Come with Real Accounting Concerns (subscription required), which includes commentary from Stephen Ambler.

Stephen Ambler is a director at RoseRyan, where he manages the development of the firm’s “dream team” of consultants. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at Nasdaq-listed companies.

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