How boards are preparing for the rise of crypto

As blockchain digital assets become more common, directors believe they will influence roles and responsibilities in the boardroom.

The once-niche market for blockchain digital assets (BCDAs), such as cryptocurrencies, stable coins, and non-fungible tokens (NFTs), has gone mainstream. Major retailers accept Bitcoin for payments, and crypto trading platforms have gone public. Despite the recent downturn in the crypto economy, other types of BCDAs are increasingly popular and proving useful to business and consumers. As a result, some boards are no longer able to ignore the opportunity or disruptive impact they could have on business.

“Cryptocurrencies are quickly becoming a more common form of currency,” says Dottie Schindlinger, executive director of the Diligent Institute, the corporate governance research arm and think tank of Diligent. “With increased attention from stakeholder groups, investors, and regulators, trends around cryptocurrency and other BCDAs should be something directors have a pulse on.”

To learn more about how well directors understand BCDAs, the Diligent Institute and the Silicon Valley Directors’ Exchange (SVDX) surveyed 187 public and private company directors globally in May 2022. The Blockchain Digital Assets: Fad, Disruption or Strategic Driver? study found that only 40% of board directors believe that understanding BCDAs will be important to company strategy. But Dan Siciliano, chairman of the SVDX and cofounder of Stanford’s Rock Center for Corporate Governance, notes that corporate leaders had a similar initial response regarding environmental, social, and governance (ESG) topics.

“Some directors believed that because they weren’t in an industry like energy or construction, ESG issues weren’t relevant to their organizations,” he says. “Quickly though, directors changed their views as stakeholders and shareholders grew to expect businesses to operate sustainably while actively addressing a wide range of ESG concerns. I believe the same change in expectations and attention by directors could happen with BCDAs.”

While the future of crypto is uncertain—the beginning of 2022 was not great for the market—having a more informed board can help businesses better navigate the growing opportunities as well as the risks. Yet, the study also reveals that directors are somewhat uncertain about how to navigate the world of BCDAs.

On a 10-point scale, directors in the Diligent survey rated their boards’ understanding of BCDAs at a four on average. Only six of the nearly 200 directors surveyed indicated a 10. This lack of expertise is likely a result of the BCDA field’s inherently technological nature and notable speed of evolution. As Schindlinger notes, directors rated cybersecurity and digital innovation among the hardest issues to oversee in Diligent’s 2022 edition of its What Directors Think study.

“In general, directors tend to lack understanding around new technological advancements,” Schindlinger says. “This translates to BCDAs as well, as they are a relatively new and niche topic.”

Still, boards need enough BCDA knowledge to navigate evolving shareholder expectations. For example, as employees begin to invest in cryptocurrency, some have inquired about investing in crypto as part of their 401(k) plans. “This presents a litany of risks to companies in terms of financial liabilities due to the volatility of crypto markets,” Schindlinger explains. “For directors to navigate this arena, they need to understand enough about BCDAs to be able to have the right answers.”

For directors, location also made them reluctant to embrace BCDAs. The study found a clear geographical divide regarding BCDAs’ effect on business success: When asked whether understanding this field is crucial to global competitiveness, the percentage of non-U.S. leaders to strongly agree was 10 points higher than that of U.S. directors. Non-U.S. directors were also more likely to say BCDAs’ importance in their companies’ strategies has increased since the beginning of 2022.

Schindlinger says this geographical divide is likely due to differing regulatory environments. In March 2022, President Biden issued an executive order for agencies to study “responsible development” of BCDAs in the U.S. This spurred the Treasury Department to create its first framework around how the U.S. might approach digital assets on a global stage. According to the study, 74% of directors believe that the Securities and Exchange Commission (SEC) and similar regulatory bodies will continue to materially tighten regulation of cryptocurrency in the next one to two years.

“Directors in the U.S. might be simply waiting for increased regulation and direction before they move to incorporate BCDAs into company strategy,” Siciliano says.

Beyond the regulatory climate, the crypto market presents another reason directors might be cautious: It’s volatile. For example, the two largest cryptocurrencies, by market capitalization, hit record highs in November 2021—by mid-2022, they had fallen about 70% from those peaks.

“Many boards are cautiously wading into the realm of BCDAs: They want to understand how the industry is developing, but many expressed concerns with volatility,” Schindlinger says. “As one director put it, ‘Unless the security improves dramatically, these assets will continue to be very risky.’”

Still, directors are educating themselves. Most said they do so via their own independent research (56%), with third-party experts or consultants coming in at a close second (54%). But far fewer directors get information on BCDAs from sources within their organizations, suggesting that C-suite members and board committees have an opportunity to educate.

“Though cryptocurrencies and other blockchain-based digital assets aren’t an existential threat to business, they are quickly becoming more mainstream and might present strategic opportunities,” says Schindlinger. “Keeping an eye on the crypto landscape and understanding risk and strategy around these assets will ensure that businesses are prepared for whatever trends might, or might not, emerge next.”