Crypto Treasuries, a Risky Business? | EBC11

Have a seat wherever you're comfortable. Welcome. Have a seat.

Thank you so much, Michael. Hello, everyone.

All right. Thank you so much for joining us today. I know it's last panel of the day. Stay in your seats, buckle up as we'll be talking about crypto treasuries. Is it a risk of business?

Uh I'm Alfredo Bayio. I work with the Global Blockchain Business Council. I serve as chief of staff for MA. I'll be your moderator for today. with me uh if you wouldn't mind introducing yourself.

Kush.

Hi everyone. I am Kush Bucher. I am the venture partner at Lightning Ventures. So Lightning Ventures is a US-based VC firm. We primarily invest in Bitcoin companies and our thesis is very simple.

If you're building something groundbreaking in Bitcoin, be it an exchange, wallet, infra or anything uh around it, uh we are your go-to person. And um we have invested in around uh 43 bitcoin companies till now. We do seed 3 seed and series A. Apart from that we also have a crowdfunding platform that we launched uh last year. Um it's only for uh US based companies and um but the investors could be nonacredit so anyone around the globe can invest.

Uh it's called Thunderfunder. So yeah, that's about me and I'm based out of Singapore. So it's lovely to be here in Barcelona.

Great. Yeah, thank thank you for having us. Uh my name is Pratt Vulbani. I'm a partner at the global law firm Whiting Case. We have uh if you're not familiar, we have about 2,800 lawyers and about under 50 offices throughout the world.

I'm personally based in our New York office where I oversee the firm's blockchain practice and have been working with a lot of digital asset treasury data companies recently. So happy to to share thoughts with you all.

Hi, I'm Emily Alance. I'm the director product and digital assets for standard charter based in Luxembourg and I have a dual role for Luxembourg and global. So I'm in charge of Europe and North American. I want you to help us answer this question. What are crypto treasuries and why are they a thing nowadays?

Why are they so important?

Yeah, that's a great question. Um, you know, there are a lot of different companies that could hold crypto, but I think what's probably most interesting to talk about right now are crypto strategies that are housed within public companies uh throughout the public capital markets throughout the world. That's where a lot of our clients are particularly interested. So maybe a minute or two on the history of why that's particularly interesting, why that's happening now, and sort of why they might be of interest or relevance to a lot of folks. So of course the the regulation of capital markets is a is a global and also regional thing but at least from the US perspective where where I'm based until the last uh administration the Trump administration it was very very difficult for a publicly traded company to have meaningful exposure to digital assets for a variety of reasons and with few but limited exceptions.

Um the uh classification of most digital assets as securities created a problem as an asset which which a public company could hold them. various accounting guidance basically punished the way companies needed to hold and report their assets and a variety of intermediaries in the ecosystem whether that's your your insurer for your director and officer liability insurance or your counterparties could not get comfortable with the idea of providing such services to a public company that has largely and rapidly changed almost overnight at least with respect to the US public capital markets in the Trump administration as the SEC has almost done a 180 whereas the prior posture has been almost every digital asset is a security to the current perspective at least as a policy matter if not sort of a gray letter legal matter that almost no digital asset is a security. That is a dramatic policy shift. And what that has enabled is those those companies which have been waiting to tap the public capital markets an avenue to do so. And so what we're seeing now are companies which want exposure to digital assets are gaining exposure.

sponsors that want a vehicle that's publicly traded through which to do both asset acquisition but other crypto uh inherent activities like staking investments in other entities maybe like a VC strategy or incubating other projects that are levered or that need equity capital um all can do it through a variety of strategies in what's generally called the digital asset treasury strategy and for companies companies who do that primarily as digital asset treasury companies or DAT codes.

Thank you so much Pratt. Uh and talking about strategy and mainly what can companies do uh and I'll go with you Kush on this one. In your view, what percentage allocation if any makes sense for corporates exploring Bitcoin treasury and how should they justify it to their shareholders? Um see u I I don't want to quote any number here but it depends on u company to company uh their risk exposure their time horizon what's their strategy um so so it could be um moderate exposure or it could be a high exposure depending on that and um uh uh as far as the shareholder part is concerned I mean uh you can have a strategy where you can tell them like you know you're going for a uh you have a clear strategy for your shareholder where you tell them it's either for diversification or it's against a hedge against inflation or you're trying to build a strong balance sheet and also when you are going for crypto treasuries it's very important uh to have uh risk management and also uh you know clear regulations compliance and also very important to have institutional custody with multi-ix setup up uh either three out of five or depending on uh uh you know the amount of cryptos you are holding. So that's my take.

Thank you so much. Kush piggyback from that. Pratt, do you have any any any uh point of view on on on what Kush just said? Yeah, at least from a legal perspective, there there is a still a a lingering question as to what percentage of a balance sheet can a public company hold in digital assets. Both in terms of the strategy to get one, I I'm I'm avoiding saying the word acquire one because that's a loaded legal term, but both in the first instance of I would say loading up a public company with digital assets as well as sort of the end state.

Um, one of the strategies that, uh, folks will will start seeing if they haven't already seen them is the acquisition part of the public company. Under various um, public company, changing control laws, exchange rules, securities requirements, an acquisition of a public company often times requires uh, a shareholder vote. And that is either because of the corporate law of the target that you're looking at or the rules of the exchange at which a company's listed. Um when doing that kind of changing control, one of the uh questions is are you fundamentally changing the character of a company? And so if a sponsor acquires sufficient control where it can completely change the balance sheet, let's say to 100% or virtually all primarily in crypto, that might be a change in control event.

That might require a strategy to acquire the company that may not be desirable. So there may be considerations from an acquisition standpoint that require less than 100%. There may also be various kinds of funds regulations particularly in in Europe that's an issue where if you have a public company whose predominant purpose as a reason to exist is to hold crypto that might actually trigger some fund regulations. if it doesn't have a materially substantial noncrypto or non um or or something operational to which to counterbalance the the holding and you know staking and asset management activities of crypto. So typical examples you see are maybe shell companies that perhaps haven't been as successful in their core business.

Maybe a biotech company that didn't get their next round of funding. Maybe a company that was winding down. May maybe a cryptonative company like a minor who decided they wanted to wind up their business. It's not profitable anymore, but it still has some remnants of an operational kind of vehicle. That might be something legacy that you want to keep on which to add crypto and thus the percentage of what you end up proforma whether it's 2080 50/50 whatever you know that will guide your resulting mix.

I wanted to come back to something that Kush mentioned on risk and custody and I will be asking a question now to Emily on on on that specific topic. When it comes to holding the keys, who should be holding those private keys? A regulated bank, company, the company itself.

Uh I think I have a first question um to the the I wanted to know who in this room is using cold wallet. Okay, that's good. Um well I think it's pretty much the same for institutionals uh or even corporates when they are holding uh crypto treasuries. I think uh security is one of the key element. Um however we all know that wallets they tend to be quite low or slow uh in terms of rapidity of transfer.

So it's important to find the right solution that uh allies the rapidity of transfer and the safety of the cold wallet. So that's why I don't know if you're familiar we have uh what is called the hardware security mechanisms now HSM which are trying to figure out what is the best features of both worlds and that's what we're trying as well at a stunshot you know to actually provide a solution where you can be really safe in terms of safekeeping but you do it fast so I guess the question is yes you should definitely try to trust someone else to do the key actually because uh it's not something that you can just do yourself and that's what we are observing right now that's the risks are too high to just maintain it uh individually

if if I may ask a follow question on that what sort of risks do institutions usually underestimate when holding the keys

well for the institution or corporates that are holding their own u crypto treasuries I would say um diversification of the custodian. Why so? Because just imagine you have a hack and you have just one wallet. Uh all your treasury is at risk. So it's important to diversify and potentially put it over different wallet providers or different custodian.

So you are also diversifying um the risk of server attack as well. And what is important as well is the insurance. I don't know if you're familiar with the topic. Uh I'm looking at it at the moment and it's really difficult to insure your assets and these insurance policies they have different types. So it might be that your insurance is only covering the assets on a cold wallet or on a hot wallet.

But it's really difficult to find an insurance that covers both. And you have to be careful because uh the I think it's nearly impossible to get over one billion in terms of insurance uh and coverage of your assets. So it's important as well to diversify this custodian because you can leverage the different type of insurance as well.

What what do you consider are the right now the biggest blind spots in today's insurance landscape? Well, uh first the coverage because uh most of the corporates they are global and it's difficult to find an insurer that will uh allow that. Then you have to do the due diligence on the insurance provider. It's called a specy insurance and uh usually it's uh based in the web three. So it's important to do due diligence, ensure that they are regulated, that they are licensed u because else it might be that you're insured for nothing.

Um and yeah that would be uh the main risk as well the governance due diligence. It's important to to check um how to make sure that the keys are safe. What is the process in case there is something? What are the real um risks that are insured? Some insurance are not even covering the cyber security risk for example or the loss of keys.

I wanted to jump back to to to Pratt and Kush on whether you foresee Bitcoin treasuries beyond a a balance sheet hedge uh into active liquidity. Uh Pratt and obviously we're talking about liquidity whether could be liquidity itself or collateral instruments uh in institutional markets. Um just one one actually I wanted to to speak just to a prayer. So so one of the issues about sort of the diligence and um uh you know having good insurance is the difference between being a public company and a private company is a matter of of fiduciary duties with respect to shareholders in the way the efficiency which a board can be sued is is a lot greater. And so when you're a private company, you have closely held counterparties who your investors, their interests in communicating with you in a rel relatively intimate way is is just more available.

But when you're facing as a public company a broad diversified array of shareholders oftent times who themselves are asset managers who have fiduciary duties to underlying clients because of funds they manage or because of the nature of how they're regulated. they have an incentive and in in fact you can argue an obligation to ensure that their investment vehicles, the the public companies that they invest in are operating the company in in a prudent way. And there are certain legally duties of care that boards of directors owe um to the shareholders. And because of the novelty of these DAT strategies, there is a real question both of are you sufficiently disclosing all the risks that you have operating a DAT vehicle such as do you have insurance? Who your custodians are?

Maybe you don't describe them exactly. Maybe you describe general approaches. Are you well diversified? what your internal security controls are around key management and access controls for your custodian and do you have a general sense of how you're managing that and have you sufficiently disclosed that in the DATs that we've worked on there's no particular answer to those questions. It's not like there is a rule that says yes, you must have a centralized custodian that operates according to this security standard or you cannot allocate a certain amount to self-custody, manage that with your internal treasury operations.

All of that is up for analysis uh as long as you can sufficiently justify it. But the important point is that you understand as a public company what you're doing, how you're doing it, and you have disclosed according to the standards of the exchange in which you're listed uh those risks in a way that shows that you have thought about it to to avoid any kind of lack of description of material risk to your shareholders. Kush um on on that same same virgin chain that Pratt was coming from Kush do you have any any perspective from the VC side? Um I mean I think it starts as an hedge and when it goes like if I talk about over a longterm horizon then it replaces uh bonds or any other uh traditional asset class in fact and also when you're holding say for instance bitcoin on your balance sheet there's always a choice that you know you can leverage uh it and you can have like bitcoin back loan so instead of selling your bitcoin during ing uh if you are in need of an emergency cash uh you can sell I mean you can u have bitcoin back loans. So there are a few players in the market at this point of time that offers at a very competitive price like an uh APY of uh an annual interest rate of around 3 to 4% at LTV around 70% which is great.

Um so you don't have to but but be sure that uh uh you do due diligence about uh these players um uh because uh we don't want uh uh you know Celsius or BlockFi thing happening again. So there are uh certain credible players in the market that offers uh you know such um uh you know bitcoin back loans and uh this this gives an upper edge because you have you can either have fiat or you can have stable coins and instead of selling your bitcoin you can uh you know uh have these loans and the very important part is you know you need to have an underlying business just don't go for the uh because because this epoch uh the only people are talking about is either treasuries or bitcoin back loans even smaller companies or private companies are you know joining the race because of the foromo but if you don't have an underlying business or if you don't have retained earnings uh that you can u put it on balance sheet then it's a strict no no uh I mean I'm not giving any financial advice here but this is my personal opinion

thank you so much Kush Emily I want to go back to you you mentioned uh diversification question. Uh how should institutions think about uh when diversifying across Bitcoin, Ethereum, ST stable coins and what about tokenized assets?

Yeah, I think um one of the points uh from Kush was, you know, being able to get some treasury in case you you need emergency uh funding. Well, in my opinion, uh it's important to diversify as well the crypto assets in which you're investing for your treasury because then you diversify the risks and if even if it's highly correlated between the crypto assets, you still can leverage a little bit and if one of them is really going down, it might be that the other one is going up. So, um it's important not to put all your eggs in the same basket. um as we say in French.

Uh and in terms of tokenized assets, we are seeing more and more of these. And this is where in my opinion it's highly difficult because uh there is a lack of liquidity and uh it would be really difficult to potentially liquidate your positions in this particular tokenized assets. In terms of stable coins, I think there is a huge huge push at the moment. It's a lot of buzz, but you have to be careful, especially in Europe, if you invest, you have to make sure that it's Mica compliant. So, always check the list of this uh Micah stable coins.

And um yeah, it's it's good because it's lowering the cost. So, for a treasury of big companies who are multinational and global, uh we've seen it's like 66% uh in terms of uh benefits, in terms of transaction cost. So it's not something that you can avoid right now. But where I'm really worried is the fact that uh if you check the numbers, it's 75% of the Bitcoin pool that is order right now. So you know we were willing to have something really liquid solve all the issues with Bitcoin and say okay we are reviewing the financial system as we know it.

And when you see that 75 of percent of the bitcoin are actually huddle and you're thinking okay are we really solving what we were trying to solve initially and what's next will it be like 80 90% and you can't avoid the fact that there are some whales and that there will be huge movement because if you take this company that are making investment on a regular basis like monthly basis they are constituting their reserve Just imagine micro strategy. He exits tomorrow Bitcoin. Well, I can't imagine the price of Bitcoin tomorrow, but people will cry for sure. So, you have to be careful and really try to figure out what are the best the top five, top 10 crypto to invest into and really diversify and always, you know, um do some arbitrage and make sure that you're not too much on one position instead of the others. Can can these onchain onchain versions of money make treasury operations faster?

I

I think so because um especially intra group that's really something that stable coins settlement coins are really trying to solve. Um it's you know you're just removing most of the intermediaries. You can just go from one of your wallet to the other one. Um, and it's really cheaper and faster. So sometimes when you need fast treasury, that's potentially the only way to go.

Do you have any thoughts on that, uh, Pratt?

Um, we had a lot of stable coin panels today. Uh, um, no o only to the extent that there's a lot of uh, a lot of pending legislation. I mean if you think of treasury strategy holding stable coins I generally think of that more as um sort of as Emily said operational in nature so it's a transaction execution but of course yes if you are holding um stable coins as part of your treasury there are all sorts of then imperatives that your treasurer needs to think about such as are you holding an idle asset simply to lower transaction cost or are you generating a yield on top of it as you would expect a treasurer to do with with cash that's held in a bank account or invested in short-term strategies. And so then the question will be what are the short-term yield-based strategies that are afforded to stable coins? And you know these are all things that treasurers need to think about.

Thank you. uh in terms of regulation and jurisdictions uh we seen with this new administration uh in the US um with Micah um been um out since the beginning of this year what what sort of jurisdictional challenges and this is an open question what sort of jurisdictional challenges uh do do you see for a company that's looking to uh open business and develop a a treasury strategy in either the US or Europe and what do you think should they do?

I I can answer that. So I mean one of the first things you have to think about if if you're let's say you're positioned as the sponsor you you are sold on the idea that you think you know it's interesting a Bitcoin treasury strategy is interesting or a crypto treasury strategy let's let's make it more broad is interesting. you are you are a company that maybe you're a foundation and you have a cache of stable coins or you're an operator that thinks this could be an interesting exposure within the overall enterprise of what you have. I mean the first question you have to find because you're probably pursuing this strategy as an IPO alternative is the target and the target choice is probably the most important aspect of executing this kind of strategy. Uh there are many many things to think about.

One is what is the exchange that you want to target? Obviously there are different properties of the exchanges, different regulatory regimes, clearly different liquidity profiles, right? The but the other question is also what is the company from a corporate perspective that you're targeting? Different companies have different shareholder takeover rules, different fiduciary duties. You know, I'll I'll give you an example.

One of our clients was looking at um a UK-based exchange and the target happened to be an English PLC. It so happens to be that the takeover rules for an English PLC are very protective with respect to shareholders. Notwithstanding the particular exchange in which it was traded, it turned out that given what the client wanted to do, the speed with which it wanted to do it, that wasn't a good target. It had the right profile. It had the right price.

It had the right sort of management incentive. It just wasn't the right corporate vehicle for what they wanted to do. There could have been on the same exchange with the same business profile a Cayman company or a Delaware company. Any of those would have been fine. It just happened to be that particular corporate type wasn't right for a DAT strategy.

So I'd say when thinking about executing a DAT strategy, finding the right target, not just a target is extremely important. Push.

Yeah. I just want to add one thing here. Uh the US and Europe are very matured markets. Uh comparatively I come from Asia. So uh 2024 ETF happened, institution jumped in, it paved the way for them.

Executive orders happened under Trump administration. We saw Genius Act. Great. But you know when it comes to a country like India uh you know this is a one month old news where I won't name a company but this is a public listed company that didn't get approval from Bombay stock exchange to hold cryptocurrency. The petition is under uh review at the moment.

So there is a regulatory void in u uh developing nations and I completely understand they're trying to protect retail investors. there's still a gap and um even evens are not everywhere around the globe. I come from Singapore. Singapore doesn't have ETF. Same uh you know reason.

So we have uh ETFs in Hong Kong. I think we are in a very zero to one phase. U institutional adoption is happening. But when I talk numbers, it's a good number. like a public listed company has around 1 million BTC on balance sheet worldwide and um in fact uh ETFs has like $1.

5 million. So out of $21 million you have like $2.5 million uh that's a good number to start with but there's a long way to go. So I hope it'll happen. Thank you so much for from from for that perspective Kush and we are about to finish uh the panel but I wanted to do a lightning round just simply ask there is a company that is looking to proceed with opening uh their crypto treasury what is one do and one do not they should be taking into consideration when taking that decision uh let's start with uh Emily

okay I just wanted to mention uh compared to the just to add to the previous question, Luxembourg actually just announced that they will invest 1% of the uh sovereign wealth fund uh into Bitcoin or crypto assets. So, you know, everybody is jumping on the on the wagon right now. Um to answer your question, first do is it really something that they need? Because in my opinion, you know, there is a lot of buzz. But ask yourself whether it's something that is really needed and that you will be able to do well because it's not just deciding to invest into crypto assets.

You have to think about the governance around it. Think about how you will handle this uh crypto assets where you will uh store them and hold the governance around it. So really think through the project before just jumping on it and do it from just by jumping in the pool. Um and um yeah, what are the don'ts? Um try to avoid maincoms and sorry I'm not giving any advice on that.

Thank you Brett.

Uh ve very quickly um the the the don't don't do it because everyone else is doing it I think is is the easy answer. I I'll give a very non- lawyerly response though because it's a crypto conference. Everyone who's in crypto and has been doing it for a while knows that time is of the essence. Um value is is completely based on time. And so I would say if you're going to do it, consider it deliberatively uh and act quickly and make a quick go no-go decision because there are only so many shells.

the capital markets regulators will react as soon as they absorb the information. And so the window to do something like this may may close uh sooner sooner than later. So I I would say consider it seriously if you're considering it and make a go no-go decision fairly deliberately and quickly.

Thank you Brad Kush.

As I mentioned for don'ts, uh don't go for just the narrative for the FOMO thing. Um do I mean I'm a Bitcoin maxi honestly speaking. So if I have to suggest I would say it's a it's the hardest asset class. I mean there's no I can't deny that. Uh and it's a it's I mean I'm not saying that just go with the numbers.

It's highly volatile. I agree. But you need to keep your retained earnings on a balance sheet. not not everything as she said you know uh but but uh compared to other uh you know crypto bitcoin is more um you know for a long-term asset when uh I compare it with other bonds or gold uh that's that's my bet and u I mean compared to uh if you're if you're into speculative trading then that's a complete different uh ball game altogether so it completely depends on your risk appetite and u you need to have a complete understanding of regulatory framework and compliance.

Thank you so much. And I think that's uh that's it for the day. Thank you so much for joining and for taking the time and to participants for joining us today. Have a good evening.

Thank you.