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This article was originally published in Thomson Reuters Regulatory Intelligence, on 9 March 2022, and can be accessed here

Lessons learned from KPMG’s investment in Bitcoin and Ethereum

Manoj Mistry, Managing Director, IBOS Association

Over the past two years, cryptocurrencies have become more mainstream by the day. Not to be left behind, crypto investment by blue-chip names is increasingly underpinning that mainstream tag. The most recent among them is the Canadian arm of KPMG, which recently announced that it has added Bitcoin and Ethereum to its corporate treasury, marking the first direct investment in crypto by one of the Big Four. In doing so, the accounting giant joins tens of millions of investors who have already taken the plunge.

According to Statista, the number of Blockchain wallet users worldwide has already reached 81 million with some analysts putting the total figure at around the 200 million mark. The Financial Conduct Authority (FCA) estimates that the UK currently has around 2.5 million cryptocurrency owners.

In investment terms, KPMG’s strategic decision can be seen as a reflection of how the market has developed: an explosion of investor interest and participation in crypto, as well as other blockchain technologies, such as NFTs (non-fungible tokens) and in particular decentralised finance (DeFi) technology, that has simply become too mainstream for financial heavyweights to ignore.

Although the amount of KPMG’s investment is not known, Benjie Thomas, managing partner at KPMG’s Canada office was upbeat when announcing the move. “This investment reflects our belief that institutional adoption of cryptoassets and blockchain technology will continue to grow and become a regular part of the asset mix,” he said.

Banks are also recognising cryptocurrencies as an important and maturing asset class. According to Blockdata, 55 per cent of the world’s 100 biggest banks by assets under management are currently investing directly or indirectly in companies and projects that are related to cryptocurrencies and blockchain.

With the new allocation of Bitcoin and Ethereum to its corporate treasury, KPMG also joins major companies such as MicroStrategy, Tesla and Square, which are now holding crypto on their balance sheets. For example, Tesla’s recently published accounts show that the company held almost $2 billion worth of Bitcoin holdings last year.

So what about regulation governing crypto assets? As the aggregate market value of cryptocurrencies topped the $2 trillion mark in 2021, the attention of global financial markets and investors started to become fixed on how key global regulators might respond to their associated risks.

In the UK, the FCA and the Bank of England have repeatedly cautioned investors to help them understand these risks: fraud, hacking, money laundering, sanctions risks, alongside general market and credit risks. Meanwhile, US Treasury Secretary Janet Yellen has cogently argued that fundamental questions exist about the legitimacy and stability of cryptocurrencies and that an appropriate US regulatory framework needs to be implemented.

Beyond these cautionary words, no bespoke regulatory regime for crypto has yet been devised on either side of the Atlantic, although it will inevitably happen at some point. Like the US, Canada has no crypto-specific regulation in place. Instead, it regulates cryptocurrencies under domestic securities laws as part of the mandate of its 13 securities regulatory agencies (SRAs), established by Canada’s 10 provincial and 3 territorial governments.

In terms of KPMG’s move, cryptocurrencies are not considered legal tender in Canada under the Bank of Canada Act. Accordingly, they are treated as a commodity, rather than money, while Canadian securities laws treat cryptos as tokens, classifying them as securities and therefore subject to securities requirements.

But KPMG’s decision may be related to the fact that Canada’s regulatory framework is distinctly more supportive of crypto than the US. Critically, the Canadian Securities Administrators (CSA) allow financial innovations to test the waters for a period, exempting them from the typical compliance rules that come with existing regulation. The CSA is also defining the contractual right to custodied crypto assets as a security, making Canada the world’s first jurisdiction to do so, which potentially puts Canadian crypto players on a path to regulation not yet seen elsewhere.

Of course, the addition of digital assets to KPMG’s balance sheet creates other considerations and potential risks including issues of volatility, anti-money laundering (AML) and the future of tax reform. In common with most cryptos, Bitcoin and Ethereum have been used and are regarded by investors as speculative assets due to their short-term volatility.

KPMG partners in Canada therefore have additional levels of risk and compliance to consider beyond the normal treasury considerations of holding money in accounts with a bank, which normally bears responsibility for security, AML checks and managing other associated risks. Notably, the International Financial Reporting Standards (IFRS) has no specific provisions detailing how to account for cryptocurrencies.

The growing number of large corporations that are now embracing investment in cryptocurrencies is both an exciting and welcome development. In doing so, however, it will be imperative for them to maintain an effective system of regulation and supervision in order to prevent white-collar crime, money laundering and cybersecurity breaches, among other considerations.