Business Law focuses on innovative companies at the forefront of their respective industries. The recent disclosure of Tesla’s $1.5 billion investment in bitcoin (“BTC”)[1] has served as an exclamation point to the growing institutional acceptance of BTC as a credible store of value, akin to cash reserves or gold. This trend has advanced partially due to increasing technological literacy amongst key stakeholders, but more prominently as a result of legitimate risk-reward concerns in maintaining large cash reserves when compared to alternatives, such as BTC. Amidst historically low interest rates, mounting discussion of negative rates[2], and a Federal Reserve printing press apparently stuck on the “Brrrr” setting[3], there is mounting concerns of unforeseen downside in holding cash reserves. As BTC continues its bull run[4], many companies are looking to BTC as a volatile yet high-upside store of value which can signify to investors and the general public that a business is embracing innovation and the rapidly changing digital economy.
For those businesses interested in integrating BTC into your balance sheet, we’ve put together a broad overview of steps to consider to make this integration successful.
Broad Strategy
- Clearly discuss and define the purpose of BTC investment as it relates to your corporate strategy, balance sheet, and long-term goals.
- Create an internal team with a project leader, finance working team (CFO, accounting, and/or investor relations), legal working team (General Counsel, corporate attorney, and contracts attorney), and IT (CIO / CTO).
- Develop timeline, roadmap, working relationship of internal team.
Corporate Strategy
- Key stakeholders should conduct general research on the topic.[5]
- Prepare list of key regulatory considerations impacting your company’s investment.
- Create BTC investment policy.
Finance and IT
- Analyze accounting, tax, and internal controls implications/considerations.
- Determine source of funds and associated funding needs, on-shore vs. off-shore use and transfers, bank accounts, and tax implications.
- Determine insurance coverage needs.
- Determine how to invest in BTC: directly through broker and custodian or through a fund.
Vendors and Partners
- Prepare summary of potential brokers, custodians, funds, and banks to engage.
- Prepare chart of key contractual considerations for brokerage, custodial, and/or fund agreements.
- Consider whether to store BTC investment in “hot wallets” (online) or “cold storage” (offline/physical vault); Hot wallets tend to offer greater liquidity, while cold storage offers greater security.
Execution
- Finalize internal policies (e.g. BTC trading policy, BTC reserve policy).
- Negotiate and finalize brokerage and custodial agreements.
- Train team and setup test transactions.
- Finalize accounting considerations.
- Implement appropriate IT defenses and changes.
- Obtain insurance: custodian, cyber security, D&O, and other.
- Prepare regulatory disclosures and communications strategy (if any).
- SEC disclosures: BTC-related disclosures for filings such as 8-Ks, 10-Qs, 10-Ks, etc. (if applicable).
- Conduct Board and other necessary meetings to approve new policies, brokers and custodians, and approve initial purchase of BTC.
Post-Execution
- Determine amount, timing, frequency, source of funds, and method for subsequent BTC purchases.
- Determine the need and method of external communications regarding subsequent BTC purchases.
- Conduct subsequent BTC purchases, as appropriate.
This is by no means an exhaustive list, but should provide a useful overview. A strategy to integrate BTC into your business should be tailored to the specific circumstances of your organization and your future goals. If your business is considering integrating BTC, and you have legal questions or concerns you can reach out. Let’s Talk.
[1] https://www.wsj.com/articles/tesla-buys-1-5-billion-in-bitcoin-11612791688
[2] https://www.cnn.com/2021/02/07/investing/stocks-week-ahead/index.html
[3] https://knowyourmeme.com/memes/money-printer-go-brrr; see also https://fred.stlouisfed.org/series/M1
[4] https://www.coindesk.com/price/bitcoin
[5] The best general intro to BTC are: “Inventing Bitcoin” by Yan Pritzker and “The Bitcoin Standard” by Saifedean Ammous.
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