Elon Musk has cultivated an image as a maverick, so business leaders would be forgiven for seeing his company’s recent investments in cryptocurrency as a gimmick. Certainly, Musk’s self-description as the ‘Dogefather‘, in reference to the meme-inspired cryptocurrency Dogecoin, does not suggest prudent corporate financing at work.
But Tesla’s purchase of $1.5bn in Bitcoin last year could prove influential – not least because the company generated $101m in revenue from selling some of it on. Twitter’s CFO has indicated that the company might follow suit and one financial analyst has advised Apple to do the same. Veteran business intelligence company MicroStrategy has accumulated a Bitcoin holding that was worth over $5bn last month.
Companies investing in crypto assets – which include not just currencies but also non-fungible tokens (NFTs) and other emerging digital properties – has become enough of a trend for the UK’s HMRC to issue a handbook on the tax implications. After Bitcoin as a payment mechanism and blockchain as a data management tool failed to live up to the hype, this could lead businesses to look again at the distributed-ledger technology that underpins crypto assets. At the moment, however, enterprise understanding is patchy, experts tell Tech Monitor.
Growing appetite for crypto assets
The majority of businesses polled in Deloitte’s 2020 Global Blockchain survey are open to using digital assets, with 89% of the 1,500 respondents saying they expect such assets to become very or somewhat important to their industry over the next two to three years.
Companies increasingly view cryptocurrencies as a way to boost their balance sheet, rather than as a payment method, says Ethan Pierse, the director of the Crypto Assets Institute, which advises businesses investing in digital assets.
“A lot of companies are bullish on where Bitcoin can go, and I don’t think that’s primarily about its use for payment,” he says. “Some of that is around speculative investment but some of it is around people treating [cryptocurrency] as a store of value that they believe in, one that will continue to go up or, even if it goes down, won’t go back to zero. For large corporations, this is about bringing another asset class onto their balance sheet.”
But while there is enthusiasm for investing in digital assets, knowledge of the underlying technology remains patchy according to David Furlonger, distinguished VP analyst and research fellow at tech research company Gartner, who covers blockchain. “There is still a significant educational gap that exists between the technologists who may understand the underlying technology and the business leaders who read about it in magazine articles,” Furlonger says. “People still make the connection that if we’re talking about blockchain we must be talking about Bitcoin so we must be talking about cryptocurrency, but clearly that’s not the case.”
This lack of understanding is especially problematic for banks and financial intermediaries institutions, says Arno Pernthaler, co-founder of the DEC Institute, a new consortia of leading organisations providing professional certification for those working and entering into blockchain. “Where there is a lack of knowledge is in the incumbent industries that are threatened by the development of crypto,” he says. “That’s where there is a huge gap.”
On the enterprise side, Pernthaler says businesses initially viewed blockchain as a way to improve data transparency across things like supply chains, so didn’t require deep crypto knowledge within their organisations. “In this case, the potential of the technology was a bit limited, it was an incremental innovation adding value to existing services and products,” he says. “You didn’t need to re-invent yourself and hire large amounts of experts across different domains.”
But now the situation has changed. “Enterprises are recognising the potential of tokenisation,” he says. “You’re seeing industries such as mining and commodities looking at how they can tokenise things like metals or barrels of oil, and for that, you need to decide whether you want to create a digital ecosystem, design token economics for your blockchain and provide access to other participants in the market. That requires the kind of decentralised and democratic thinking you see in the cryptocurrency and DeFi space, and there there is a massive gap [in enterprise knowledge].
The rapidly developing regulatory situation also requires careful consideration, Pearse says. Taxation is likely to be the next headache for companies investing in crypto assets. “Over the last couple of years the discussion has been around whether crypto is legal,” he says. “This has now largely been answered, and people are playing in the space, so the conversation moves on to how do you treat crypto from a tax perspective? Are we applying a general income tax? Or a capital gains tax? Every country is treating it a bit differently.”
In the UK, profits from the sale of crypto assets are subject to capital gains and corporation tax, while employees receiving benefits in crypto are subject to the usual income tax and national insurance contributions.
Crypto innovation and the CIO
The likes of Telsa and MicroStrategy might yet regret their crypto investments, whose worth depends on a collective belief in their value. But if their holdings continue to grow, more companies may be inspired to follow their lead. This in turn may lead businesses to explore the transformation potential of distributed ledger technology, which has so far failed to make much of an impact outside the financial sector.
“There’s a big difference between what Tesla is doing, which is buying Bitcoin as an intangible asset to have on its balance sheet, and having a defined strategy that says ‘we’re going to offer a new UX that allows customers to pay in Bitcoin’, or ‘we’re going to think about how we can reward employees using tokenised incentives’,” says Furlonger. “Using crypto assets should be about running your business in a fundamentally different way, and I don’t think enough executives are focusing on this.”
As tech leaders, CIOs can play an influential role in decisions around crypto assets, he adds. “I think CIOs should also consider whether they can bring about crypto innovation in their own domain, the IT department, as well as the broader context of the organisation.”
Indeed, IT departments can act as a test bed for the wider adoption of crypto assets, Furlonger says. “You could perhaps launch a token within the department as an incentive or to encourage collaboration,” he explains. “Then you have a real-life test case in a relatively risk-free environment that you can show to the rest of the organisation as an example of how digital assets can improve operations.”
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