Cryptocurrencies: Considerations for Treasuries

6 Cryptocurrencies: Considerations for Treasuries Managing Crypto Risk AML and source of funds risk — un-hosted wallets and the travel rule Crypto transfers, while completely transparent, are pseudonymous. While in theory this is good for consumer privacy, it introduces a few challenges, including how to manage source of funds risk. This is the risk that the funds are the proceeds from a crime, a sanctioned party, or from money laundering. In the formal monetary system, while not perfect, guidance or regulation like the Bank Secrecy Act’s “travel rule,” which helps to reduce these risks by requiring banks and other financial participants to insert remitter details into transactions over $350USD. This allows the receiving bank and participant to screen the details and ensure there are no sanctions concerns. There are consortiums working toward solving this and groups like The U.S. Travel Rule Working Group (USTRWG) have already published white papers. 4 Concentration risk Similar to how an organization would manage non-functional currency, (i. e., a currency in which an organization does not have natural expenses or investment needs), treasuries should look to limit concentration and convert to a functional currency where possible. Limiting exposures to only the amounts needed for investment purposes or to support operational activity should be a foundational approach. Operational and InfoSec risks In the agent model, where an exchange, custodian, or wallet is doing the hard work of collecting and transferring fiat to the organization, it is “much ado about nothing” (apart from counterparty risk) for the organization itself. While the direct model is unlikely to be a widely chosen approach, an organization deciding to manage its own private keys is introducing significantly more complexities and a more robust InfoSec strategy becomes pivotal. Stories about lost crypto keys or passwords and millions of dollars going unclaimed have been all over the news, and these are the realities of a digital bearer instrument, underscoring the importance of password management and maintenance procedures. Moreover, the challenge of key management can be exacerbated given that compromised passwords potentially allow a bad actor to become the bearer of an organization’s instruments. Hedging price risks As highlighted above, price moves are a key aspect for any corporate treasury contemplating crypto acceptance. The Chicago Mercantile Exchange (CME) is one group offering tools, intended to provide users of bitcoin specifically with a method to manage risk and hedge bitcoin exposures by offering bitcoin futures. 5 The CME bitcoin future is in essence a US Dollar, cash settled contract based on the CME Crypto Facilities (CF) Bitcoin Reference Rate (BRR). The BRR is a once-a-day reference rate based on the USD price of bitcoin from major spot exchanges. The rate is calculated as the USD price of one bitcoin, based on the total flow of these exchanges during a one-hour window. “On the corporate side, use cases for digital assets are expanding rapidly as they position themselves to conduct more commerce in digital and participate in the growing cryptoeconomy.” Brett Tejpaul Head of Sales, Trading, Custody and Prime Services — Coinbase 4 https://www.gdf.io/wp-content/uploads/2020/10/USTRWG-Travel-Rule-Solution-V1.pdf 5 https://www.cmegroup.com/trading/bitcoin-futures.html “Accepting cryptocurrency has given us some great learning opportunities. However, due to the price volatility and considerations around holding it on our balance sheet at this stage, we’ve elected to de-risk by letting our agent take care of conversion and delivering us fiat.” Dean Jordaan Director eCommerce and Payments — Microsoft