As the giants of the financial world enter the arena, this is a critical do-or-die moment for crypto natives.
The cryptocurrency market is going through some major changes as traditional financial institutions increasingly dive into their world. Take PayPal, for example, which launched its own stablecoin in August 2023, marking a significant milestone as the first major US financial company to do so.
Another noteworthy event is the US Securities and Exchange Commission’s acceptance of BlackRock’s application for a bitcoin ETF in July 2023. While not a full approval, this move signals a growing, if tentative, acknowledgment of cryptocurrencies as a legitimate asset class.
This wave of fresh interest speaks volumes about the growing acceptance of cryptocurrencies within mainstream finance. If the comparatively rookie crypto-native institutions are planning to stick around, they need to be ready to compete with traditional finance on their level. It’s time for crypto firms to take a page from the Wall Street handbook and get their treasury house in order.
It’s also important to remember that regulators are already keeping a close eye on crypto. When an exchange fails on the treasury management front, it’s like waving a red flag in front of a bull, leading to greater scrutiny. As crypto companies navigate this evolving financial landscape, they not only face the pressure of ensuring sound treasury practices for their own sake, but also must consider the heightened watchfulness of regulatory authorities.
Learning from the past
The evolution of the crypto landscape over the past decade has taught the industry some important lessons — especially from the devastating experiences of early crypto startups that fell prey to inadequate financial, managerial and legal practices.
These crypto institutions have learned the hard way, navigating through a labyrinth of financial mistakes, regulatory challenges and scandals that have shaped their resilience and adaptability.
We saw the collapse of Terra and LUNA in May 2022, which many believed marked the first major bank run in crypto. The calamity took out massive swathes of the industry, exposing the huge shortfalls in managing counterparty risk. Another case in point is crypto exchange FTX, which went bust in November 2022 following a whirlwind of criminal malpractice on an Enron scale.
The FTX collapse serves as a glaring example of financial mismanagement, compounded by the perilous treasury practices observed among many of its crypto startup clients. Rather than spreading their entire capital across exchanges or safeguarding it in self-custody accounts, many entrusted their assets solely to FTX, intensifying the repercussions of the collapse and highlighting the need for improved risk management and diversification strategies within the crypto ecosystem.
Despite recent progress in regulatory compliance, security measures and investor safeguards within the crypto industry, these incidents and others worldwide underscore the ongoing need for significant improvements in treasury management practices.
Wall Street can teach us
Effective treasury management is the pivotal factor that will dictate the success and resilience of crypto institutions.
At its core, treasury management involves managing cash flow, assessing and mitigating risks, strategic asset investment and ensuring compliance with regulatory reporting protocols. Sounds boring. But considering that crypto companies face unique challenges, including extreme market volatility, regulatory uncertainties and tricky liquidity management — as well as the increasing existential threat of Wall Street moving in on their territory — all this means that it is absolutely crucial to have strategies in place to keep one’s company financially sound.
The ongoing uncertainty in the crypto landscape underscores the need for sound treasury management practices, including diversification, risk assessment and hedging strategies. Diversifying assets and rigorous risk assessments help mitigate the inherent volatility in the crypto sector, while effective hedging can provide an additional layer of protection. No amount of innovation is going to supersede these core financial principles.
Read more from our opinion section: Yes, crypto is ready for Wall Street
The same principles in traditional financial treasury management practices can be applied directly to the crypto realm. A critical step for crypto institutions is adopting a risk-based approach to treasury management, systematically evaluating potential risks and rewards to make informed decisions aligned with their goals.
Another consideration is to collaborate with third-party vendors. This is crucial for specialized treasury services encompassing cash management and risk mitigation. Tapping into an individual’s or organization’s expert knowledge and resources has its own advantages, as well. Recognizing the synergy between financial professionals and technologists is also vital. Collaboration amplifies treasury management’s efficacy, leveraging both disciplines for comprehensive success.
The evolving crypto landscape cannot survive without crypto-native firms taking a more proactive approach toward treasury management. By blending traditional financial wisdom with crypto’s unique dynamics, firms can build a solid treasury framework that will help them navigate uncertainty and capitalize on opportunities.
Failure to do so will leave crypto firms vulnerable to the same pitfalls that befell those who neglected sound treasury practices in the past, potentially resulting in financial instability, loss of user trust, and, ultimately, their own downfall.
Matthew Liu is partner and CSO at SynFutures, a decentralized derivatives trading platform. A veteran of the finance industry, he spent several years working in trading and investments for a bank and large multinational fintech company. Matthew spent several years working in trading and investments for Deutsche Bank and General Motors. Matthew also established one of the world’s largest consortium blockchain-based cross-border trade finance platforms at Ant Financial.
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