Cost of financial distress and Cryptocurrency: Difference between pages

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''Corporate finance''.
A cryptocurrency is a virtual digital currency based on cryptography and peer-to-peer networking, for example Bitcoin.


According to Modigliani and Miller's theory, as a company’s capital structure is composed of more and more debt a point is reached where equity cost and debt cost increase beyond that predicted by pure arbitrage of the appropriate cost of capital for the business. 
Sometimes known as 'crypto-assets', also written ''cryptoassets''.
This extra cost is described as the cost of financial distress; potentially the cost of dealing with a near-insolvency situation.


Financial distress costs can include:
o Higher rates of interest payable on borrowings.
o Additional fees payable on new borrowings.
o Additional restrictive covenants for new borrowings.
o Reduced availability of borrowings.
o Reduced availability of trade credit.
o Management time and loss of operational focus through the additional communications needed with lenders.
o In the worst case, actual insolvency.


The point at which financial distress costs become significant can be difficult to predict with precision.
:<span style="color:#4B0082">'''''Cryptocurrency, central bank digital currency (CBDC) & regulation'''''</span>
However it can be estimated by reference to industry norms for key financial credit assessment ratios such as interest cover and debt equity ratios.


At the point at which the borrower breaches the industry norm for key ratios, it is likely that significant financial distress costs will be incurred.
:"A CBDC would be fundamentally different to cryptocurrencies or cryptoassets.
 
:Cryptoassets combine new payments systems with new currencies that are not issued by a central bank...
 
:Our Financial Policy Committee has assessed cryptoassets and concluded that they do not currently pose a risk to monetary or financial stability in the UK. However, cryptoassets do pose risks to investors and anyone buying cryptoassets should be prepared to lose all their money...
 
:HMT’s proposed approach [is] for an overarching framework to bring crypto-assets into the scope of activities that are regulated – the ‘regulatory perimeter’."
 
:''Bank of England - CBDC versus cryptocurrency''


Also known as Bankruptcy costs.


== See also ==
== See also ==
* [[Debt equity ratio]]
* [[Altcoin]]
* [[Insolvency]]
* [[Bank of England]]
* [[Interest cover]]
* [[Bitcoin]]
* [[Modigliani and Miller]]
* [[Blockchain]]
* [[Central bank digital currency]]  (CBDC))
* [[Crypto-assets]]
* [[Cryptography]]
* [[Digital currency]]
* [[Ether]]
* [[Fiat currency]]
* [[Financial Policy Committee]]
* [[Gold standard]]
* [[HM Treasury]]  (HMT)
* [[Libra]]
* [[Money]]
* [[Non-fungible token]]
* [[Ripple]]
 
 
===Other links===
[https://www.bankofengland.co.uk/research/digital-currencies Central bank digital currencies - Bank of England]
 
[[Category:Cash_management]]

Revision as of 01:57, 27 August 2021

A cryptocurrency is a virtual digital currency based on cryptography and peer-to-peer networking, for example Bitcoin.

Sometimes known as 'crypto-assets', also written cryptoassets.


Cryptocurrency, central bank digital currency (CBDC) & regulation
"A CBDC would be fundamentally different to cryptocurrencies or cryptoassets.
Cryptoassets combine new payments systems with new currencies that are not issued by a central bank...
Our Financial Policy Committee has assessed cryptoassets and concluded that they do not currently pose a risk to monetary or financial stability in the UK. However, cryptoassets do pose risks to investors and anyone buying cryptoassets should be prepared to lose all their money...
HMT’s proposed approach [is] for an overarching framework to bring crypto-assets into the scope of activities that are regulated – the ‘regulatory perimeter’."
Bank of England - CBDC versus cryptocurrency


See also


Other links

Central bank digital currencies - Bank of England

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