The Evolution of Treasury in Crypto: Exploring Ripple's Approach

The Evolving Role of Treasury in the Crypto World: A Comparison with Traditional Corporate Treasury Functions

Adam

With the rise of cryptocurrencies and blockchain technology, the role of Treasury is undergoing a significant transformation. Traditional corporate treasury functions have long been the backbone of financial management, ensuring liquidity, managing risk, and overseeing cash flow. However, with companies like Ripple leading the charge in the crypto and digital payments space, a new type of treasury function has emerged—one that blends these conventional responsibilities with the added complexities of managing digital assets. In this blog post, we’ll explore the key differences between a traditional corporate treasury function and a crypto treasury function, using Ripple’s unique approach as a case study.

Traditional Corporate Treasury: A Brief Overview

In a traditional corporate setting, the treasury function’s role is centred around managing the company’s financial resources to ensure stability and growth. The primary responsibilities include:

Liquidity Management: Ensuring that the company has enough cash flow to meet its short-term obligations while optimising the use of excess cash.
Risk Management: Identifying and mitigating financial risks, such as currency fluctuations, interest rate changes, and credit risks.
Funding and Capital Management: Overseeing the company’s debt and equity financing, including issuing bonds, managing loans, and ensuring efficient capital allocation.
Cash Management: Handling day-to-day cash flow operations, optimising cash reserves, and managing bank relationships.
Investment Management: Investing excess cash in low-risk securities to generate returns while preserving capital.

These functions are typically executed in fiat currencies, with a focus on traditional financial instruments and banking relationships.

Treasury in a Crypto Company: The Ripple Case

In contrast, a treasury function in a crypto company like Ripple operates in a vastly different environment, where digital assets and blockchain technology are at the core of the business. Ripple, a company known for its cryptocurrency XRP and blockchain-based payment solutions, splits its treasury function into two distinct sides: the crypto side and the fiat side. Each of these sides comes with its own set of challenges and responsibilities, which differ significantly from those in traditional corporate treasury functions.

1. The Crypto Side: Managing Digital Assets

The crypto side of Ripple’s Treasury function focusses on managing the liquidity of XRP and various stablecoins used to fund customer transactions and facilitate settlements. Here’s a closer look at the key responsibilities:

Liquidity Planning

Just like in traditional Treasury function, liquidity management is crucial, but the assets involved are cryptocurrencies. The crypto treasury team must ensure that there is sufficient liquidity in XRP and other digital assets to meet the company’s operational needs and customer demands. For a crypto treasury function, it is critical to have excellent forecasting and close relationships with upstream and downstream partners, because holding excess liquidity of any crypto asset may result in increased risk of impairment. It also underscores the need for high-trust stablecoins that minimise these risks.

For a company like Ripple, the crypto treasury function works to understand customer demand for various crypto assets (by engaging customer-facing functions internally), and ensure proper fiat currency funding is in place to facilitate the repurchase of said crypto assets from open markets.

Market Operations

A critical part of the crypto treasury function’s role is facilitating settlements for the repurchase of assets like XRP on the open market. This task requires a deep understanding of the mechanics of blockchain-based transactions, which vary between different blockchains and crypto assets. The crypto treasury function must be adept at timing these operations to minimise costs and optimise asset value. This may involve settling trades either in fiat currencies or using stablecoins, each having distinct advantages and limitations. Liquidity in crypto markets—especially in stablecoins—is growing rapidly, and consequently, the settlement of crypto trades and cross border movements will become much easier for traditional corporations in the coming years.

Risk Management in Crypto

The volatility of cryptocurrencies introduces unique risks that require constant monitoring and management. Unlike traditional treasury functions, which primarily deal with fiat currency risks, a crypto treasury function must navigate the complexities of price swings, regulatory changes, and market liquidity challenges in real-time. Minimising balance sheet holdings of volatile assets is a primary focus for crypto treasury functions and underscores the need and appetite for stablecoins. As non-FIs seek to mitigate the potential risks of utilising crypto assets in their operations, the demand for stable, high-trust stablecoins will surely grow.

Security and Custody

Managing digital assets also involves ensuring their security. This includes using custodial services, managing private keys, and implementing measures to protect against cyber threats. The crypto treasury function must be familiar with the latest blockchain security practices and technology and proactively mitigate risks by applying sufficient resourcing to the systems and headcount required to properly secure crypto holdings.

2. The Fiat Side: Traditional Responsibilities with a Twist

While Ripple operates heavily in the crypto space, it still maintains a traditional fiat side to its treasury function. This side of the treasury handles many of the same responsibilities as a conventional corporate treasurer but with additional complexities brought about by the integration of crypto operations.

Cash Flow Management

Similar to traditional treasury roles, managing cash flow remains a priority. However, the integration with crypto operations means the treasurer must coordinate between fiat and digital assets, ensuring that both sides are aligned in meeting the company’s financial needs.

Bank Relationships

Ripple’s fiat treasury function manages relationships with traditional banks and financial institutions, but with the added complexity of integrating crypto transactions. This often involves navigating a regulatory environment and KYC challenges that are still catching up with the realities of digital assets and the pace of innovation in the blockchain economy.

Regulatory Compliance

As a company operating in both fiat and crypto worlds, Ripple’s treasury function must stay compliant with a diverse set of regulations. The fiat treasury function must adhere to both traditional financial regulations and the evolving standards in the crypto industry to ensure a compliance-first mindset and build trust with customers and trading partners.

Key Differences and Challenges

Asset Volatility

Traditional treasury functions primarily manage assets that have relatively stable values, such as cash, bonds, or equities. In contrast, a crypto treasury deals with highly volatile digital assets, requiring a laser-focused approach to risk management and liquidity planning.

Technology and Security

While traditional treasury functions rely on well-established financial systems and security protocols, crypto treasury functions must be well-versed in fledgling blockchain technology, cybersecurity, and the unique and evolving risks associated with many different digital assets.

Regulatory Landscape

Traditional Treasury functions are governed by well-established regulations. In the crypto space, however, regulations are still evolving, and the crypto treasury function must be proactive in navigating this uncertain environment to establish trust and provide transparency for customers and regulators.

Market Dynamics

The crypto market operates 24/7 and is highly reactive to global events. A crypto treasury function must be prepared to respond to market movements at any time, unlike traditional treasury functions, which operate within the confines of regular market hours. This involves structuring your team with global coverage and having effective back-up plans for trading and trade approvals in every time zone.

Conclusion

The role of a treasury function in a crypto company like Ripple represents an exciting blend of traditional financial management and cutting-edge technology. While the core principles of treasury management—such as liquidity, risk management, and capital preservation—remain relevant, the methods and tools used to achieve these goals differ significantly in the crypto space.

As cryptocurrencies, stablecoins, and blockchain technology continue to gain traction, the treasury function within these companies will likely evolve further, potentially setting new standards for financial management in the digital age. For those in traditional corporate treasury roles, understanding these differences is essential, as the skills and knowledge developed in the crypto space will become invaluable across the broader financial industry and will make its way into the traditional corporate treasury function soon enough.

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