🤿 Sunday Deep Dive: Bitcoin on your balance sheet

Mar 8, 2021

Welcome to another Sunday night edition of FORWARD GC: from beginners’ guides to timely features, explore essays that make legal a little more understandable. Courtesy of Lawtrades—a software company building legal infrastructure for data-driven teams.

Is Bitcoin on your mind? If so, there’s good reason. The market value of one Bitcoin, the OG cryptocurrency, has gone up from ~$30,000 to ~$52,000 since late January. Around this time last year, one coin was trading for ~$4,000. Some analysts think a single Bitcoin could fetch a mind-boggling $500,00 by the end of the decade.

In response to Bitcoin’s bull run, financial institutions and companies that once feared its volatility have started using it for investments. Even some of the most financially cautious have gotten into the mix, with the endowments for universities like Harvard and Brown buying Bitcoin.

What about your company? Has it been thinking about adding Bitcoin to the balance sheet?

Before making the move, you’ll need to make legal plans. The panel from Microstrategy provided pointers about the legal steps you should consider. The panelists included Microstrategy’s general counsel, W. Ming Shao, and assistant general counsel, Euna Greene, as well as Perkins Coie partner J. Dax Hansen and WilmerHale partner Thomas S. Ward.

Here are some of their takeaways and general information about cryptocurrency.

1. Get to know Bitcoin

Actual Bitcoins are virtually mined from a digitized central source. Only 21 million Bitcoins can ever be mined and about 18.5 million are already in circulation. Mining has become more difficult over the years, and it is expected that the final Bitcoin won’t be mined for at least another 100 years.

Regular people and regular companies do not mine Bitcoin. (Well, you technically could, but it would be a really bad idea!) They buy it from an exchange, either in whole or partial Bitcoins.

Other types of cryptocurrencies are also available, but Bitcoin is the best known.

2. Check with your board and management

Bitcoin is probably unlike anything your company has invested in before. It is not a security, and it is possible that you would need to help your management or a board reconfigure company bylaws or best practices.

“We had to get approval from the board to do investing especially at any significant levels,” said Greene, the assistant GC for Microstrategy.

3. Know the applicable laws and your options

Because Bitcoin is not a security, some regulations that apply to companies making traditional investments (particularly public companies) do not generally count. According to Perkins Coie partner Dax Hansen, federal and state business laws are usually irrelevant, as are commodities laws. He said federal sanctions laws, such as from the Office of Foreign Assets Control, could be relevant, given the international nature of Bitcoin.

Basically, you’ll want to be sure you’re not trading Bitcoin with any international “enemies.”

You can also get into Bitcoin without trading for the actual currency. Some companies use less volatile options for Bitcoin through derivative trading or ETFs. These types of investments would count as securities, so more traditional investment laws could apply.

4. Look for and vet outside help

You can’t do this on your own. To make Bitcoin a major part of a business, you’ll need brokers and custodians.

Before looking, have an idea about your needs. Some brokers, for instance, may not be able to help with derivatives, if that’s your strategy.

WilmerHale partner Thomas Ward also recommends thinking how any vendor is legally incorporated. “What is the sophistication of the regulator above them? That can help you find out how protected you are as a customer,” he said.

Once settling on a vendor, Ward said to build a smart contract. One major concern, in addition to indemnity and other common pieces: timing. Make sure you have a buy/sell structure that works quickly enough, given how fast prices can change for Bitcoin.

5. Set up “guardrails”

With something as new as Bitcoin, there is no blueprint for every company to follow. Everyone will have to pick plans that make sense for them. (If you’re curious this is Microstrategy’s “Treasury Reserve Policy” for its adoption of Bitcoin as its primary reserve asset).

But Hansen recommends thinking of these “guardrails” to help structure a plan for your company:

Investment objectives
Regulatory profile
Risk appetite
Governance structure
Any relevant partners

“Recognize this is an evolving area where the legal landscape changes frequently,” he said. “Be nimble.”

Thanks for reading. Hope you’re enjoying your Sunday night.

🧐 Raad