It has been a fascinating, and occasionally hair-raising, past few months for digital assets.
In the latter category we can file the latest cryptocurrency crash, which tore across the market in the week of Monday 17 January. In what amounted to a 24-hour bloodbath, the values of Bitcoin and Ethereum plummeted – with the undertow also dragging down a crop of smaller rivals, including Solana, Cardano, XRP and Binance’s BNB.
With total losses reckoned at around $200bn, the crash prompted Forbes to herald the prospect of a ‘crypto winter’: a phrase that seems tactically designed to make enthusiasts of the above currencies wonder what they’ve been getting themselves into. Indeed, the esteemed journal even drew comparisons with the 1929 Wall Street Crash.
Under those circumstances, it would not be surprising to hear a rallying cry from fans of stablecoins – products generally regarded as safer and more reliable, as they are typically backed by other assets, such as fiat currencies or physical commodities.
But in the final months of last year, stablecoins also faced intense scrutiny.
On 1 November, the US Treasury-based President’s Working Group on Financial Markets published a report recommending that Congress should establish formal regulations for stablecoins, in light of concerns over potential non-compliance with anti-money laundering (AML) and countering the financing of terrorism rules.
In the days before Christmas that call was amplified by senior US Treasury figure Nellie Liang – undersecretary for domestic finance. Speaking to Bloomberg, Liang urged lawmakers to act promptly on the issue and empower regulators with properly targeted oversight, rather than leave them to “use what authority they have”.
Which makes the next development all the more remarkable.
On 13 January, Alex Song – head of finance at US fintech Ramp – published a detailed blog providing an account of why, and how, he had invested part of the firm’s treasury portfolio in the stablecoin USDC. For any corporate treasurer with even a passing interest in how the future of finance is taking shape, it is a compelling, engrossing read.
One aspect of the blog that particularly stands out is how Song carefully offset the urge to innovate with the treasurer’s keen eye for risk management. For example, he recounts, Ramp spent a total of four months carrying out due diligence on the concept, assessing it in the context of numerous factors – including, but by no means limited to:
With all that in mind, The Treasurer contacted Song to ask him how Ramp geared up for the project, and how it has played out so far.
Perhaps the best place to start is with the overarching point of contrast: from a treasury standpoint, what has a stablecoin such as USDC got that one of the best-known cryptocurrencies hasn’t?
“With the recent crash fresh in our minds,” Song says, “we can all now see why many corporate treasuries and conservative investors haven’t done anything in the crypto space. When it’s going up, it’s great, right? We see certain tech companies putting tons of cash into Bitcoin – and maybe that’s aligned with the creativity of those businesses. But for firms that don’t run crypto-related products or services, or accept crypto as payment, it’s hard to justify.
“Plus, when you look at something like Bitcoin, both its implied and realised volatility are somewhere in the vicinity of 100%. And frankly, as a corporate treasurer with a fiduciary duty to your board, that doesn’t look viable. Even the S&P 500 has a volatility of around 25%, which would make some treasurers think twice.”
Song explains: “The most important factor that anchored our discussions was preservation of capital. As such, we chose Circle as our delivery partner. USDC is their baby, and we have the confidence of knowing not only that the coin is dollar backed, but that Grant Thornton are getting into it every month to carry out audits.
“So, we set out on this journey in the knowledge that USDC is underpinned by a hard asset and subject to independent verification. And that really helps to build a bridge between the dynamic world of crypto and someone like myself. We’re not a crypto firm – we provide expense management software and corporate credit cards. But as a fintech, we were curious about whether we could make stablecoins work for our treasury portfolio.”
Song’s principle of capital preservation drove his internal discussions with Ramp’s senior team and that all-important due diligence process. “When you’re doing something like this for the first time,” he says, “it’s important to take everyone’s temperature and ask some fundamental questions. For example: do we have the risk appetite? Is this aligned with our broader mission as a company? And how entrepreneurial can we get?”
Those discussions and the due diligence effort motivated and informed each other in the months before the go-ahead. “I had to produce a lot of preparatory materials,” Song recalls. “Everything from an analysis of risks and rewards to notes from diligence calls with market participants, plus references – not just relating to Circle, but a host of other players in the crypto ecosystem too.”
When Ramp gave Song the green light, he approached the investment process with a strategic eye. “We decided that the way we would treat our portfolio would be to create an ‘other’ bucket. The core bucket would contain investment-grade and corporate bonds: triple-A through to triple-B – very short-duration, liquid assets.
“In parallel, we would allocate a smaller percentage to the ‘other’ bucket, where we could be a little bit more entrepreneurial. And, to be clear, the size of that bucket is a single-digit percentage allocation – nothing crazy. That’s where we began.”
Crucially, Song notes, his fact-finding around the ‘other’ bucket’s contents is ongoing. “I’m still on calls every week with market participants,” he says, “obtaining further research and an additional flavour for market trends. And these conversations inform my decision-making about our allocation.”
He explains: “One benefit of Circle’s offering is that if I needed to do something as drastic as taking our USDC allocation down to zero, I could do that pretty quickly. In that sense, it’s not so different to trading liquid bonds: in an emergency bonds scenario, I could call our trader and, in the space of a day, he could move hundreds of millions of dollars off my balance sheet. USDC has a similar profile, which helps me feel more comfortable.”
Turning to the critical area of outcomes, Song is pleased with the performance of Ramp’s USDC investment. “With the caveat that it varies over time,” he says, “there are weeks or months where we achieve yields of around 5%, and others where we get around 7%. And these are real dollars. Obviously, we receive interest in the stablecoin format – but we’ve tested the system, and we’ve converted that interest into US dollars and banked it.”
He notes: “In practical terms, we are able to generate the same quantity of returns from the ‘other’ bucket in one month as we achieve over the whole of the rest of the portfolio in the course of a year.
“That’s no exaggeration. If you consider the ultraconservative, short-duration bonds in the other 90-odd per cent of our portfolio, we’re probably generating between 30 and 60 basis points – which makes sense: we’re not talking five- or 10-year bonds here. Yet on the other hand, here’s this little, single-digit allocation and, instead of 30 to 60 basis points, I’m making a 5-7% yield. So I would say our realised outcomes are very positive.”
Song’s project and the blog that arose from it have made waves. “I would say that close to two dozen CFOs in our customer base have reached out to me since the blog went live and said, ‘Hey, Alex – can we talk about this? I want to see if I can get something similar through my board.’ So I think this could be the start of something larger within our immediate community.”
As for whether Ramp’s nudge into stablecoins is a short-term experiment or the prelude to more ambitious plans, Song says: “You can probably tell from the tone of my blog that we want to do more. And that feels authentic to who we are as a business. We see scope for applying the ‘build-and-open’ ethos that drives our software innovations to how we use stablecoins in a treasury context.”
Matt Packer is a freelance business, finance and leadership journalist
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