Financial institutions aren’t shy of experimenting and structuring new products. Fisco, a Japanese-based financial information provider, has issued debt denominated in Bitcoins.
Japan takes the lead
Japan has been at the forefront of regulating Bitcoin, with the government legalizing Bitcoins as a form of payment early this year. Regulators have also exempted Bitcoin from sales tax, increasing the volume of Bitcoin trades and at one point making Japan the largest Bitcoin market.
It comes as no surprise that a Japanese company, Fisco, has taken the lead in experimenting with Bitcoin bonds. As per a Bloomberg report, Fisco has issued a three year debt of 200 Bitcoins to another group firm.
The bond has a three percent interest rate. The company aims to arrange cryptocurrency debt for its clients if the Bitcoin market develops.
While Wall Street has taken an interest in cryptocurrencies, there haven’t been too many Bitcoin-denominated financial products so far. The efforts of the Winklevoss twins and others to start a Bitcoin ETF has remained stuck in regulatory red tape.
Borrowing in an appreciating currency – a recipe for disaster?
In the opinion of a substantial majority of people, the outlook for Bitcoin in the long term is positive. Bitcoin, although a risky asset, is expected to grow by leaps and bounds in the medium term.
In such a scenario, issuing bonds denominated in Bitcoin might be a recipe for disaster. One million dollars borrowed in mid-July could turn into debt of two million dollars in mid-August.
Ordinary businesses, whose core competency is not Bitcoin trading, cannot afford to take this substantial risk. Bitcoin-denominated loans could make sense to two types of companies. One, if the company is a Bitcoin trader who wants to take a short position in Bitcoin.
The other are companies whose earnings are denominated in Bitcoin (such as Bitcoin mining companies) who stand to benefit from Bitcoin price appreciation and can afford to pay back debt denominated in Bitcoin.
For ordinary companies, issuing Bitcoin-denominated debt is foolhardy.