Crypto in Treasury: Wallets, KYC and Risk

There are various types of treasury management systems out there, right? So...

For cryptocurrencies, let's say stablecoins, they offer you a good, quick and easy way to make certain international payments. You can easily make those payments to certain suppliers who want to have the security of a stable currency, or in this case the cryptocurrency, at a low cost and quick processing time.

Probably in the beginning it's better to really use a...

Hi Phil, thank you for having me today. It's a pleasure. So my name is Simon Ostrozlik, right? I live in Austria. And yeah, I have a background in treasury of about 12, 13 years by now, working in various companies, from startups through midsize entities to international global companies, in different sectors.

Yes, you're right. So I have some experience in working and dealing with cryptocurrencies. So obviously cryptocurrencies have been a topic in the past years. Yeah, there are a couple of reasons that come to my mind when you are asking about the requirements or the necessity to work with cryptocurrencies. So it can be that on the payment side, cryptocurrencies, let's say stablecoins, offer you a good, quick and easy way to make certain international payments, right? So I think whoever deals in an international environment with international payments still knows how difficult it might be to make international payments, right? And especially in, let's say, not the big standard currencies, right? Going through intermediary banks, yeah, it might take several days of processing, plus there are considerable fees that come with it, right? So if you have something like the stablecoins, which are pegged to the US dollar for example, you can easily make those payments to certain suppliers who want to have the security of a stable currency, or in this case the cryptocurrency, at a low cost and quick processing time, right? Without dealing with the hassle of, yeah, certain intermediary banks, long waiting times and so on, right? So it might be a good option in certain companies, certain environments, on the payment side. But also if you have individual customers, it offers an additional possibility for them to, let's say, make transfers to you, in such cases as for example deposits on certain platforms or similar setups, right? So it's also just an additional option on the customer side that you provide. Right now I wouldn't say that these cryptocurrencies replace fiat currency or would be a major, let's say, option in terms of payments or transfers incoming, but they can offer you those kinds of extra special options. Yeah, that might be useful depending on the customer setup. Right. Theoretically you could look at the option of holding a certain amount of cryptocurrency, but yeah, I don't think that would be a topic for most of the treasuries, right? Recently I actually heard a couple of cases where companies which were in countries with capital restrictions, the cryptocurrencies actually offered an option for them to get some funds out through some regulatory, let's say, loopholes. Yeah. But just another example of cases that I've recently heard around this topic.

Correct. Yeah. You want to offer, let's say, as many options or possibilities for your partners. If that's an environment that you deal in, right, or your company is, let's say, internationally or globally set up, right, you come into those topics. Yeah. And you as a treasury, you know, you realize you need to be flexible, trying to support the business or make certain operations or processes happen. Yeah. If it's on the customer or supplier side.

Correct. As I said, right, I would see this rather as a minor topic. Yeah. So, I wouldn't say it's the majority of customers or suppliers. Yeah. But there is some demand for this kind of option on both sides. Yeah. So, it's just an extra or additional railway offering to your partners.

Probably rather domain specific, right? And it's rather individual customers, right, in the B2C space. If you have any online platforms where customers deposit funds or want to pay through these cryptocurrency railways. Yeah. But yeah, again, I would say it's rather a small portion as well on the customer side.

Yes, sure. So, you have to decide about the custody model first, let's say. So, are you going to have your own cold wallet, or one with a financial institution or financial partner who offers a cryptocurrency wallet? Right?

So a cold wallet is essentially a hardware token that you hold yourself, right? And you have passwords on it and it's not constantly connected, right? And you are essentially holding this. Yeah. Whereas when you have a wallet with an external partner, they are responsible for it. Yeah. So if you set up a wallet with them, essentially the KYC process is very similar, right? You have to go through the whole documentation process, very similar to holding bank accounts, right? So that's like on the custody side. Yeah. Now, if you have your own wallet, you have to make sure when you set up the wallet that the appropriate accesses are set up. You have to have your passwords and phrases stored properly. You have to have recovery means. Yeah, you can set up, you know, individual or dual signature for example, but you need to make sure that you can recover any passwords, or if anything happens or some person leaves, that you have the appropriate backup processes, right? So it's not like if you forget your password with a banking institution or a cryptocurrency provider, where you know you have their recovery processes on their side. Yeah. So with your own wallet you need to make sure that you have the security and backup plans in place.

So you set up your own cold wallet, right? So if you think about the start of cryptocurrencies, the whole point was that people would connect to the ledger through their laptop and not be dependent on a bank institution, let's say, right? And now with the cryptocurrencies, or the cryptocurrency wallets that are being held with institutions, again you have these intermediaries in place. Yeah. But with your own wallet you essentially hold the crypto on your own wallet. Yeah. So you don't have a KYC process in that case.

Yeah. So probably that's when you need a cryptocurrency exchange. Yeah. And there you will have to go through the KYC, right? And also the same proof of funds. So you have to show where these cryptocurrencies are coming from. Yeah. So in that case, yes. Then you most likely need to go through a cryptocurrency exchange. Yeah.

Probably in the beginning, it's better to really use a specialized financial institution who processes the crypto for you, right? So, you go through the KYC, you ask them to set up a wallet with the currency you want, right? So the most common would be Bitcoin or a stablecoin, and to process payments through them, right? I think it's still hard to get kind of an automation like you have with the banks in terms of sending payments out of your ERP system and receiving them automatically. So probably you need to have some sort of upload for a special file. But at least, let's say, on the incoming side they will provide some statements for you, right? Still, the question is you need to know where, let's say, funds are coming from. Yeah. Because payment details as you know them from a regular bank statement, you don't necessarily have on the blockchain. All right. So, for this kind of information, you need to set up an information rail, let's say, with your partners in order for you to know where funds are coming from and then of course afterwards account for it. Yeah. So, to start with, yeah, for sure I would recommend to go through a financial institution.

I mean, you have the classic big ones, right? Kraken or Binance, Coinbase, the big ones that come to my mind.

Oh, too much hassle. KYC is quite a bit of a hassle, I would say. Yeah. So, it still can take a few months. As I said, it's quite comparable to a regular bank account. Yeah.

Yeah, might be. Yeah, very similar, right? I would say these kinds of compliance topics, if it's anti-money laundering topics, proof of funds, information about the business, it's quite similar, I would say.

Yes, I would say so. Yeah. So nowadays for the KYC processes I would count on two, three months. Yeah.

Yeah. So you have to have an information channel with the counterparty, right? So either through email or some other information channel, that will probably be the most likely one to send you the information. Yeah. I mean, we know it from regular payments banking as well. Often if you trigger payments, let's say, out of your ERP, you would set up an email sending the remittance information to your counterparty, right? So this is kind of similar, the other way around, that you would receive this information via email, let's say.

Yeah, I mean, if you have a platform, normally the counterparty, let's say the client, would have a profile set up there, right? So it would be them triggering the payment through the platform, and then the information would be reported through that, right? So you know which customer the payment came from, right? Or on the platform, when they make a crypto transfer, they would have to upload, let's say, the transaction hash in the platform, right? So obviously it's in their interest to inform you about it, right? Or at some point you would be asking, let's say if you don't record a payment from their side, you would reach out to them, right? And then you would get the transaction hash key.

Yeah. So similar, right? So Stripe, I think they do also offer this stablecoin, let's say, payments or deposits railway, right? I don't know the specifics in those cases or for those platforms, but normally that will be information that's then registered through the platform, right? So you can reconcile or account for it on your side.

So as a treasurer, let's say if you want to avoid the whole volatility of a Bitcoin for example, you would try to mitigate this risk by, let's say, checking or knowing how many outflows or inflows you expect, your forecast, and to know if you are going to be short or long in that currency. Yeah, if the inflows are more or less covering the expected outflows, you would hold them and just use them for your operational outflows, right? If you, let's say, expect that your outflows will be lower than your inflows, it depends on how much, you know, your company is willing to hold this cryptocurrency, right? And every cryptocurrency is not the same, right? So if you're talking about the stablecoins, whose value, you know, depends on the US dollar, it's a different topic than with a Bitcoin, right? Where it's really hard to predict how the price of a Bitcoin will move, right? And we have seen this extreme volatility, right? So for a treasury, you probably would want to minimize your exposure on that side. Yeah. In general, you would match your inflows and outflows and then plan around either the surplus or shortfall for the foreseeable future. Yeah, I would expect that most companies would still prefer, you know, to hold the liquidity, or the majority of the liquidity, in their fiat currency or home currency or whatever fiat currency they need. Yeah. And then exchange the cryptocurrencies for it, right?

It will depend on the volume as well, for sure. Yeah. And the cryptocurrency again, right? So, if you're talking about the big stablecoins and Bitcoin, it goes fairly fast, right? With the other cryptocurrencies there might be, or there will be for sure, more friction. Yeah.

Yeah. So for sure the fees or the spread are higher than exchanging euro against US dollar, right? So if you're exchanging euro US dollar, the spread is very minimal. Yeah. Cryptocurrency to either euro or US dollar, this can be, you know, 0.0 something% or 0.1%. Yeah. So there the fees can be way, way higher than with the regular fiat currency exchange.

Yeah. 0.1, could be 0.2. Yeah. Depends again on volume, agreements. But that you need to plan for, I would say. Yeah.

Correct. And I would expect that here the exposure you hold with these institutions, you will want to be much smaller than with, you know, the large banks that are out there, right? We have heard all the stories about them being hacked and whatever can happen there, right? So on the treasury side, you want to be on the safe side. Yeah. And probably not hold too large amounts with those cryptocurrency exchanges, I would say. Right. So either you really manage to hold the volume and amounts quite low with one, or you really spread it out over a few of them. Yeah. And if you can, exchange them for your fiat currency. Yeah. So you try to plan ahead, at least for the next few months. Yeah. How much cryptocurrency you will need, and the rest convert into your fiat currency. Yeah. Of course you want to avoid converting it into your fiat currency and then needing to buy cryptocurrency later on, probably.

I haven't really dealt with it, right? But as far as I know, there are some possibilities through forward agreements, or potentially even futures or options, as far as I know. So I think those, let's say, products are out there. Again, I'm not sure about the price of those, because I don't think that, you know, for hedging cryptocurrency, the pricing will be similar to when you're thinking about hedging US dollar, euros, for example. Yeah. So, you have to consider that as well. But as far as I know, those products should be available.

Well, expert. But then again, it depends on the needs of your company, right? If, let's say, outflows and inflows more or less cover each other, and also total volumes, right? So if you are a large company and you really deal in millions, tens of millions of cryptocurrencies, it's probably a point that you would look into, right? Or if you have spikes in outflows, inflows, or mismatching of the timings. Yeah. That you need to bridge, essentially. Yeah. So there are various factors that this would depend on, whether you actually utilize those hedging products.

Well, I didn't have experience with it, but I heard it from other treasurers, that they actually managed to, let's say, move funds out of countries with capital restrictions. Yeah, no experience on my side with that. But it wouldn't surprise me, right, that there were, let's say, regulatory loopholes in those countries that allowed them to, you know, purchase cryptocurrency for the local one and get funds out. Yeah. But yeah, maybe a topic to follow, or maybe by now these kinds of loopholes are closed. Who knows? Yeah. But I found it an interesting topic, as there are still quite a few countries with capital restrictions.

Yeah, so there are various types of treasury management systems out there, right? So big treasury system providers, treasury systems light. So be clear on what you actually need and also what your company needs. So for example other departments or areas within finance, and what you might need in future, right? As basic, let's say, requirements, from my perspective, would be, you know, all the connections, statements processing, payments processing, right? So the basics. And then really think about the functionalities that you might need, or might need in future, right? And that can be, you know, in connection with your accounting department, right? Could be in connection with your tax department, right? And KYC, for example. Yeah. So that would be, let's say, one point. The second point, I guess, would be: when you see all the demos or presentations, the systems can do everything. Yeah. But in the end, you really need to make sure. So either you have some sort of checklist where you really specifically write down what you need, from payments, statements, processing, currencies and so on, you know, export format, import format, and make sure that is included in your contract. Because often, you know, you have a contract, then afterwards you want a specific functionality, and you might realize that that's actually not included in the module that was included in the contract, because this is something different, right? Or specific to a different module on the TMS side. Yeah. So really make sure the functionality is clearly laid out, written and included in the agreement. Yeah. And yeah, the third point, I mean, cost is always a factor, I would say. Yeah. So I have seen prices that, you know, were two, three, four times as high as other competitors, or really from the first offer to the final offer there were differences of 50, 60, 70%. Right? So you really see a big gap in terms of pricing and also flexibility from the TMS providers.

There's a lot of room, I would say. Right.

Correct. Yeah. And those are things that you miss, right? And since you mentioned payments, with the TMS providers there are really various approaches on their side, and the functionality in terms of how they process your payment files can really vary, right? So from, let's say, the setup where the actual payment file needs to come out of your ERP, you know, ready to be sent to the bank, to, let's say, you send a document with the invoice data and the supplier data, and the TMS recognizes, okay, this is a domestic payment in this currency in that country, and I'm going to configure the payment file and send it to the bank like that, right? So it also finds the best and cheapest processing channel. Yeah. So specifically in the payment module, with a good TMS provider you have this set up in a couple of weeks, to, if it's not a good TMS provider, it will take you four, five, six months. Yeah. And internal resources additionally and so on. Yeah. So there you can really see big differences, especially if you're really an international company with a lot of, you know, local accounts, local payment methods. Yeah. If you just, you know, have SEPA and wires, okay, yeah, fairly easy. Yeah. But also on the banking side, even if you are dealing with big banks within Europe, in euro denominated or euro currency countries, there can still be differences in how they are accepting SEPA payment files. So that can happen as well.

Yeah, kind of. So the basic questions, you know: in what kind of format can you import and export files, right? Are there limitations in terms of how much you can import and export? I've recently looked into TMS systems, right? And nowadays, with all the AI topics and everything being connected, most of them, you know, are kind of built so that you can connect all the systems and everything is done automatically. But from my experience, you still need ways to manually import files, if it's certain transactions or balances. Because, I don't know, you have a corporate credit card program and there are, you know, cards which hold balances, or accounts, and they don't provide the feed, but you want to make sure that you can import it manually, right? Or you have, you know, investment accounts, yeah, that cannot send the camt file or whatever file with the data. You need to import at least the balance or transactions manually. And a lot of systems were like, well, we can do everything automatically, but this manual import, yeah, keying in or whatever, this we need to look into. Yeah. And discuss.

Yeah. For some reason it becomes complex then, right? And also, you know, when you connect your other systems, you might have several different ERP systems. You might want to have a data warehouse. And a lot of the providers now have, you know, automatic connectors and so on. Yeah. With big systems. Yeah. But if you are not on a big ERP system or any similar system, you need to look into the details together with your IT team and the TMS provider to ensure that you can actually connect properly and transfer the data between the systems.

Yeah, like exporting transactional data, right? So there was a case where we had monthly transactions which were several tens of thousands, right? And in the end, I had to do several exports because there was a limit of 10,000 rows, right?

And it's not something you necessarily ask, right? So, how much can you export, right? Yeah. And I guess one more important point is, you know, customer service, which is hard to really ask about or get proven beforehand, right? So each of the contracts will probably have an SLA that, you know, an answer will be within two, four hours, whatever the limits are. And I think now I have seen, you know, you can have customer service and then customer service pro, however you want to call it, so you need to pay more for quicker response times, right? So already there I've seen certain levels or packages that TMS providers offer. And I have seen good customer support and bad customer support. And if you have bad customer support, you know, payment file generation doesn't work for you and you need to do payments, and then it takes several days to get an answer, and then extra, you know, effort on their side to fix it. So that should be a point that you also focus on in the contract, that you really make sure what the times are, and potentially, you know, liability, or however you want to call it, credit for you if these are not met. Yeah.

Correct. Right. So one point to mitigate this is the contract. The second one, what you want to do is ask for a reference before you sign a contract, right? So you ask for one or two references, usually you would have a call, and that would be a point to ask, right, how their experience is when they needed help with the system, and that would be, you know, post implementation. Yeah. So during implementation, okay, usually you have your dedicated contact, project manager, but then post handover, the customer support, you really want to know if the TMS provider has good customer service or not.

It's one of the points you want to get covered, right? So obviously it's also good that you ask about how the system works and everything, but customer support, I guess, this would be a way to get more information on the actual experience of other customers.

Yeah, depends on the topic. Payments would be one of the more important ones, that it's, you know, dealt with and preferably fixed within 24, 48 hours.

Yeah, so most likely all of those TMS providers will have some sort of general support ticketing system, right? So that's kind of a given for me. But you want to have a relationship manager who you can contact as well, either by email or phone, and he can then really support you. Yeah. So the relationship, or the contact with a relationship manager, can really help on this side. Right. So similar to what you have with your bank. Yeah. You have a contact that you can really reach out to if there is an urgent issue.

Yeah. And here I have seen different setups from TMS providers. So some have this general ticket system and then it goes somewhere to the customer service team. Yeah. And it gets treated. But some really have smaller teams, and they have a few clients which they deal with whenever something comes up, right? So they at least already know a bit about your setup and potential issues. So probably that's a bit better than, you know, a ticket goes to some back office team, to any person, and then, you know, they ask you, okay, who are you, how are you set up and so on, right? How is this set up? Yeah, so I've seen that as well. Yeah, getting the question, so how is this set up? I'm like, I'm not the technical expert here on how this is set up. So it took them some time to figure it out between us two. Yeah.

Correct. If you are a smaller company, not some, you know, huge large corporate, you're going to be some number. Probably their system is going to be less flexible. So you're going to need to wait for some update which is then scheduled in two weeks over the weekend to fix the issue. So this opens the door, you know, for small TMS providers being more flexible, more customer oriented. So yeah, that would be an advantage of going with a smaller or less known provider.

Yeah, I mean, you know, if you had asked me this seven, eight, nine years ago, I would have said, yeah, there's going to be a few big providers that can handle everything, but we see nowadays that's not the case. Yeah, we have seen in the last years a lot of new providers, especially of course with AI, and specializing in certain topics. Yeah. Whenever you ask treasurers what their biggest topic or biggest issue or biggest challenge is, most likely it will be cash flow forecasting. Yeah. So you have seen in the last years a lot of new providers which specialize around that topic. Yeah. There are obviously advantages with having one big provider who can handle everything, right, from statements, payments and then FX, hedging, bank account management and so on. I have the feeling it's not necessarily the best to be dependent on one TMS provider in the end. So depending on your scope, obviously, you might really look into potentially having two, with some processes with one and the other processes with the other one. Yeah. Now with AI, I was thinking about it: will AI improve, let's say, the functionalities and the ease of using a big TMS system? It's hard to say. Yeah. But yeah, even if you think of the big TMS systems, you know, there's a lot of resources behind them. There are plenty of processes inside those which could be better. Yeah. Could be more flexible. So I guess I would be saying it might be worth looking into not being dependent only on one TMS provider going forward as well.

Yeah. And yeah, it's surprising how many TMS providers are out there right now, and some of them don't really know about the other providers, right? So when you talk to some of them and you tell them, ah, you looked into this and that TMS system, some are like, surprised, what is that TMS system? Yeah. Although you would think that it's some sort of smaller community and they would also know about the newer ones. Yeah. But apparently not.

Yeah.

Yeah, for treasury, I guess when you go into treasury, make sure that you establish good relationships with internal and external stakeholders, because you will need them. Out of experience, if you're in treasury, you will deal with most of the departments that you have in the company, right? So treasury is not some sort of a silo, but you will for sure deal with most of your other internal departments. So make sure you have good relationships established with them and also with external ones, right? So banks, for example. Especially when times are becoming hard, you might really need the support of your relationship banks, right? That will be one thing. And the other thing would be: make sure you know the business, right? In the end, whatever is going on in the business, you will most likely see it at some point connected to cash, right? So if it's projects, processes, decisions that are being made, they will most likely affect you in treasury. Yeah. If it's new markets, you need new accounts, deal with new currencies, deal with suppliers, customers potentially. So really make sure you know the business, because then you also can make the difference, or the value added that treasury can bring to the table, right? Bringing solutions. Whenever, you know, the business is moving, growing, expanding, treasury will often be asked to find solutions to support the business in its journey.

Yeah, probably through LinkedIn.