Treasury Management in Web3

Disclaimer, these are personal opinions and not financial advice.

When big banks fail, politicians and central bankers are quick to respond. The Fed, ECB and other central banks have printed $25 trillion out of thin air since 2008. This is roughly equivalent to the US GDP. Some of us remember Mario Draghi in 2012 to do “whatever it takes” to rescue the EU-financial system. Following the SVB crisis, the same strategy has been applied to prevent a complete collapse of US banks. Open the debt floodgates at zero interest rates to prevent liquidity shortages. Two weeks ago, US banks borrowed $300B literally in days if not hours from the Fed.

But what about start-ups? Obviously, you cannot rely on some upper forces to bail you out just as governments do with “too big to fail”-entities. Therefore, treasury management for startups have become a real skill set. And even more so if you are in the Web3 space which is volatile as hell.

Below I address some of the risk categories that I believe are most important and urgent. As a startup you must think about worst case scenarios and derive tangible action items.

Bank Risk: First, watch out for unusual movements of your bank in the quarter-to-quarter balance sheets & earnings that affect quick ratio, liquidity, operating leverage. Here is good overview of bank metrics to look at specifically. Also make a list of knowledgeable people that you follow on twitter. For example, this short seller’s tweet predicted two months ahead of SVB’s crash that the bank is in deep trouble. Massive deposit outflows caused by interest rate hikes of the Fed in combination with heavy investments in low yield 10yr+ mortgages forced them to go for an equity raise, which ultimately failed. The downward spiral leading to a bank-run is history. Do not wait for guru #peterthiel to withdraw your money.

Second, what is size of the bank? If it is top tier bank, chances are high that it falls under the “too-big-to-fail” doctrine, which means that government-like institutions will likely bail them out via deposit insurances. However, those are capped at a specific amount. Also, determine whether the bank is engaged in investment banking activities that expose it to risky businesses. A small bank size hence often correlates with lower risk portfolios. Local banks can be a good alternative. Diversification in several jurisdictions and currencies might be worthwhile. But you need to make a trade off against the efforts that are needed to manage them. Do you have an experienced CFO with a global mindset to do so?

Currency Risk: Many companies that I have spoken to have put their money in US treasury bills as a save haven. Oil, global trade, crypto currencies are all denominated in USD. The question is: How long will this last? China has a vested interest in creating an alternative to the USD hegemony, and there is a high chance that they might succeed in their endeavors in challenging the petrodollar regime as an example. If you are a non-US based entity that must pay salaries in EU for instance, or have high foreign denominated expenses, you might and should as well think about diversifying your fiat currency exposure. Being biased and bullish on crypto, think of BTC as a store of value. Monetary supply is fixed and there is no single authority who can print BTC out of thin air.

Crypto Custody: If you have substantial amounts of crypto in your balance sheet there are three things to think about: First, do you operate a multi-sig, meaning a single individual cannot become single point of failure. Second, what is your exposure to non-custodial vs. custodial custody. Regarding custodial, you should think about diversifying your asset base that sits in centralized exchanges. Bear in mind that the largest crypto exchange is currently being sued by the CFTC on the area of crypto trading and derivatives. The outcome of this indictment could potentially have systemic consequences for the entire crypto industry. But is Coinbase a better alternative? Let’s not forget that they are stock listed. In a worst-case scenario a stock that crashes can lead to a massive loss of trust and bank run.

Third, what is your exposure to stablecoins? Personally, I am very cautious when it comes to stablecoins. None of them has solved the stablecoin trilemma between price stability, capital efficiency and decentralization in a convincing way. In times of “normal” operations stablecoins are great, but when “shit hits the fence”, you will need a lot of valium to keep functioning. Weeks ago, USDC which has been considered a safe haven stablecoin, suddenly de-pegged to 88cents temporarily sending adrenaline of the entire crypto industry to heights. And it was only due to heavy buying pressure caused by traders that USDC eventually re-pegged.

Geopolitical Risks: The risks described here are obvious to most of us. But have we really thought through a chain of actions we need to undertake in case the worst case scenario happens ? First, there is the US – China conflict which will be fought out on two terrains: The South-China Sea territorial dispute and the issue of Taiwan as a sovereign country. Given that Xi has gotten himself a third term, we can expect a solution of the conflicts to happen within his life time. As history has shown, when an incumbent empire is endangered by another upcoming empire, this usually ends up in a war which would number three in this case. Second, successful spring offensives by Ukraine could lead to the usage of tactical nuclear weapons ordered by Putin. Even in that case, NATO and the US would have to declare war to expel the aggressors from Ukrainian territory.

Regarding resources, the following issues need to be addressed:

1.?????What are your concrete actions when the scenarios above come into play? Have you spoken them out and expressed a clear response and strategy? Differentiate between long-term and short-term scenarios?

2.?????Who oversees treasury management? Do you have the right skill set in the organization or do you have to outsource it?

3.?????Are you talking with your stakeholders, shareholders, board members and investors frequently about those issues and exchange knowledge?

4.?????Do you have the right tools to monitor changes in the risk assessment?

Again, this is not financial advice but rather food for thought. Am I missing on any risk scenarios? Please comment below to share your best practices regarding treasury management. As some statements might be polarizing, I will remove any comments that are toxic. Thank you for your understanding.?