Crypto treasury firms, which manage digital assets like Bitcoin, are facing scrutiny due to perceived similarities to the collateralized debt obligations (CDOs) that played a significant role in the 2008 financial crisis. This comparison, highlighted by Josip Rupena, CEO of lending platform Milo, suggests that these firms introduce multiple layers of risk to an asset class that inherently has reduced or no counterparty risk.

The CDO Parallel

CDOs, which were securitized baskets of mortgages and other debts, became infamous for spreading risk throughout the financial system in opaque ways. Rupena argues that crypto treasury companies, in a similar fashion, take relatively sound assets like Bitcoin and introduce risks related to corporate management, cybersecurity, and the ability to generate cash flow. This "engineering" of digital assets can leave investors unsure about the true nature of their exposure.

Risks Introduced by Crypto Treasury Firms

Several types of risks are associated with crypto treasuries:

• Management Competence: The effectiveness of the corporate management team in navigating the volatile crypto market and making sound investment decisions is crucial.
• Cybersecurity: Crypto assets are vulnerable to hacks and theft, making robust cybersecurity measures essential.
• Cash Flow Generation: The ability of the business to generate sufficient cash flow to meet its obligations is vital, especially during market downturns.
• Liquidity Risk: Events that reduce an organization's ability to pay its obligations on time can create liquidity issues.
• Market Risk: Crypto treasuries are exposed to market risks, stemming from volatility in prices like interest rates, and currency exchange rates.
• Operational Risk: Risks related to day-to-day activities, such as treasury processes, key man risks, legal & compliance, governance failures, payments, or cybersecurity breaches.
• Counterparty Risk: The risk of dealing with unreliable or compromised entities in the crypto space.

Potential for Market Contagion

While Rupena doesn't anticipate crypto treasury companies triggering the next bear market, he cautions that overleveraged firms could exacerbate a downturn through forced selling. If companies are compelled to sell their crypto assets to cover debts, it could depress prices and create a market-wide contagion.

The Role of Digital Assets in Corporate Treasury Management

Despite the risks, digital assets are increasingly viewed as strategic tools in corporate treasury management. Companies are incorporating Bitcoin, stablecoins, and other tokens into their reserve assets to enhance liquidity, optimize tax strategies, and strategically allocate capital. Blockchain-based markets offer near-instant settlement and deep liquidity, freeing up capital and enhancing operational flexibility. Digital assets can also provide inflation hedging and value preservation, with some cryptocurrencies having fixed supply rules.

Managing Risk in Crypto Treasuries

Effective crypto treasury management requires a focus on digital asset security, such as using multi-signature wallets. Traditional treasury management emphasizes liquidity and foreign exchange risks, while crypto treasury management requires more complex hedging strategies due to price volatility. Diversification across different asset types is crucial, along with robust governance and custodial practices. Monitoring cash flow projections and staying compliant with evolving regulations are also essential.

The Future of Crypto Treasury Management

As the crypto landscape evolves, organizations must adopt best practices in crypto treasury management to minimize market impact and regulatory scrutiny. Converting Bitcoin payments into stablecoins or fiat currencies can reduce volatility risks. Strategic partnerships and technological innovations are also helping to unlock the full potential of digital assets in treasury management.