Crypto’s Path to Outsmarting Wall Street: Prioritizing Effective Treasury Management

Opinion: Until Cryptocurrency Nails the Fundamentals, Wall Street Will Maintain the Upper Hand.

In a pivotal moment for crypto enthusiasts, the traditional financial giants are making their way into the cryptocurrency arena. A prime example of this transition is PayPal, which marked a milestone in August 2023 by launching its stablecoin, becoming the first major US financial company to do so.

Another significant event was the US Securities and Exchange Commission’s acceptance of BlackRock’s application for a Bitcoin ETF in July 2023. While this wasn’t full approval, it did signify a growing acknowledgment of cryptocurrencies as a legitimate asset class, albeit with some caution.

The surge in interest from traditional finance underscores the growing acceptance of cryptocurrencies within mainstream financial circles. For crypto-native institutions, this shift means it’s time to prepare for a new level of competition with traditional financial players. To remain in the game, crypto firms need to follow the financial strategies of Wall Street and ensure robust treasury management practices.

Regulators are already closely monitoring the crypto space. Any mishandling of treasury management is like a red flag that attracts regulatory scrutiny. As crypto companies navigate the evolving financial landscape, they must not only uphold sound treasury practices for their good but also be aware of the heightened oversight by regulatory authorities.

Learning from Past Lessons

The crypto industry has learned some valuable lessons over the past decade, especially from the struggles of early crypto startups that fell victim to inadequate financial, managerial, and legal practices.

The collapse of Terra and LUNA in May 2022, widely viewed as the first major bank run in crypto, exposed significant shortcomings in managing counterparty risk and had widespread repercussions. Additionally, the FTX exchange’s downfall in November 2022, following criminal malpractice, illustrated severe financial mismanagement within the crypto ecosystem.

Rather than relying solely on a single exchange, many crypto startups entrusted all their assets to FTX, intensifying the fallout of its collapse. This highlighted the urgent need for improved risk management and diversification strategies in the crypto space.

Despite recent advancements in regulatory compliance, security measures, and investor protections, these incidents serve as reminders that significant improvements in treasury management practices are essential for the crypto industry’s continued growth and stability.

In the evolving landscape of cryptocurrencies, the principles of traditional financial treasury management take center stage as a critical factor determining the success and resilience of crypto institutions.

At its core, treasury management involves the careful management of cash flow, the assessment and mitigation of risks, strategic asset investment, and adherence to regulatory reporting requirements. While this might not seem glamorous, the unique challenges faced by crypto companies, including extreme market volatility, regulatory uncertainties, and complex liquidity management, make it vital to have robust financial strategies in place to ensure the company’s financial stability.

The ongoing uncertainties in the crypto world emphasize the importance of sound treasury management practices. This includes diversification of assets, rigorous risk assessments, and hedging strategies to mitigate the inherent volatility of the crypto sector and provide an extra layer of protection.

The same principles that underpin traditional financial treasury management practices can be directly applied to the crypto realm. A key step for crypto institutions is to adopt a risk-based approach to treasury management, systematically evaluating potential risks and rewards to make informed decisions aligned with their goals.

Collaboration with third-party vendors for specialized treasury services, such as cash management and risk mitigation, is crucial. Leveraging the expertise and resources of individuals or organizations in this domain can offer significant advantages. Recognizing the synergy between financial professionals and technologists is also vital, as collaboration enhances the effectiveness of treasury management by combining both disciplines for comprehensive success.

The evolving crypto landscape relies on crypto-native firms taking a proactive approach to treasury management. By combining traditional financial wisdom with the unique dynamics of the crypto world, these firms can establish a solid treasury framework to navigate uncertainty and seize opportunities.

Failure to do so may leave crypto companies vulnerable to the same pitfalls that have affected those who neglected sound treasury practices in the past, potentially leading to financial instability, a loss of user trust, and, ultimately, their downfall.

Matthew Liu, Partner and CSO at SynFutures, a decentralized derivatives trading platform, emphasizes the importance of financial expertise in the crypto space. With experience in trading and investments for Deutsche Bank and General Motors, Matthew’s insight highlights the necessity of comprehensive treasury management strategies for the crypto industry’s long-term success.

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