Despite numerous failures, characteristic of a nascent industry, successful cryptocurrencies and their surrounding decentralised finance (DeFi) ecosystems have grown into a trillion-dollar industry in little more than a decade. The prospect of this growth is so lucrative that after years of hesitation and opposition, some of the largest financial institutions are now joining the ecosystem through direct investments and partnerships.
The rapid growth of these ecosystems has created a new opportunity: expanding funds of their own. Through various mechanisms such as fees and collateral, existing projects build up their own funds. These funds are then used for important purposes: product financing or market development activities.
Recent examples of project funds are eye-catching:
Of course, what comes next is perhaps even more interesting: as projects grow and mature, their treasuries become so large that they will certainly need more structured ways to be managed. This is when the ‘virtual’ world starts to interact with the ‘real’ world.
Enter ‘decentralised treasury management’. While in spirit very similar to traditional treasury management, there are unique challenges that decentralised treasury management must address, such as:
The Decentralized Treasury Working Group (DTWG), of the Blockchain Governance Initiative Network (BGIN), is dedicated to answering these and other questions. BGIN is a think tank that acts as a neutral, independent platform for multiple stakeholders interested in blockchain governance. Set up after the G20 meeting in Japan in 2019, we try to bring together regulators, investors, entrepreneurs, academics and engineers to have a better understanding of decentralised (blockchain and distributed ledger) initiatives.
We are also simultaneously concerned with mirrored critical points:
Traditional treasurers and corporate financial officers can benefit from a number of the advantages of decentralised systems: cryptographic privacy, distributed information and near real-time exchange.
But more specifically, digital currencies, especially stablecoins, represent a rapidly growing digital means of exchange. Especially after recent events, fully collateralised stablecoins have emerged as potential digital fiats, in much the same way that money market funds represented a viable alternative to traditional banking accounts back in the 1970s.
Digital assets further represent a growing segment of alternative assets. These developments point to digital assets and their corresponding decentralised ecosystems as rapidly emerging potential cash management tools.
The first and foremost challenge for traditional treasury officers is the unfamiliarity of the decentralised digital finance world. We believe that empowering traditional treasurers requires education. This education component is a missing link in bringing the traditional and decentralised treasury management together.
Given the recent failures of Terra Luna (once the fastest-growing algorithmic stablecoin), Celsius (a crypto lending giant), Three Arrows (a crypto hedge fund) and others, we believe that spreading appropriate knowledge about the inner working of various projects and ecosystems is of vital importance. We believe the future of finance is digital as evidenced not only by the burgeoning rise of the decentralised ecosystem, but also by growing interest in central bank digital currency projects and widespread moves towards real-time settlements.
After all, the history of financial innovation is marred by initial exuberance, painful failures and subsequently sustained growth.
Leon Molchanovsky and Ali Nejadmalayeri are co-chairs at DTWG, BGIN. Nejadmalayeri is the John A Guthrie endowed chair in banking and financial services at the University of Wyoming. Opinions expressed here are his alone and do not reflect the official stance of the University of Wyoming and the State of Wyoming and their related entities.
