Net Debt: Why Digital Currencies Like Bitcoin Don’t Look Like Cash In Our Ratio Analysis

Tesla purchased $1.5 billion worth of bitcoin in January and then announced it would begin accepting bitcoin as payment, subject to applicable laws and initially on a limited basis. While it’s still atypical for businesses to acquire digital currency, it may just be the start of a trend. For now, at least, S&P Global Ratings considers cryptocurrency a risk in our debt calculations.


Consideration of digital currency in our debt measures

The US accounting standards body, the Financial Accounting Standards Board, currently considers digital currency an intangible asset, which does not give it the same status as liquid investments that companies hold on their balance sheets. The International Accounting Standards Board also considers digital currency a non-financial asset for accounting purposes.

S&P Global Ratings considers two key factors relating to cash and cash equivalents, as well as other investments, to determine whether they can be used in our calculation of net debt: affordability and liquidity.

Accessibility focuses on quickly converting the investment held into cash, if needed to pay off a debt, for example. We believe that investments should be able to be liquidated quickly and not require steep discounts. In the case of bitcoin, this is directly related to the available market to quickly sell large volumes of bitcoin combined with the risk of volatility in the current environment. Although there are exchanges to buy and sell digital currency, daily price fluctuation and lack of regulation create operational and legal risks. At the same time, the value of bitcoin and other cryptocurrencies cannot be ignored. So while we won’t treat bitcoin as equivalent to cash, we can consider this qualitatively in some cases – for example via the capital structure modifier in our business methodology.

Liquidity relates to the ease of access to regulated markets to buy and sell investments. In the case of a digital currency like bitcoin, this is related to regulatory risk. We also exclude these arrangements from sources of liquidity in our analysis of non-financial corporate liquidity.

In our view, the stated value of any digital currency held on a company’s balance sheet is not like accessible cash and will not be used in our net debt calculation in the case of Tesla. This will appropriately reflect the market and regulatory risk of digital currency in the current environment. If the regulations governing digital currency move towards greater acceptance, we might see digital currency as closer to accessible cash.

Related searches and criteria

  • The future of banking: Cryptocurrencies are still mostly about speculation, not payments, March 8, 2021
  • The Future of Banking: Central Bank Digital Currency Can Replace Cash, Not Banks, December 2, 2020
  • The future of banking: China’s digital renminbi could reach payment platforms, November 11, 2020
  • The Future of Banking: Building a Token Collection, July 1, 2020
  • The Future of Banking: When Central Banks Embrace Crypto, February 11, 2020
  • Criteria | Companies | General: Business Methodology: Ratios and Adjustments, April 1, 2019
  • Guidance | Criteria | Companies | General: Business Methodology: Ratios and Adjustments, April 1, 2019

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