How do crypto companies compete with Wall Street giants? Starting with fund management

Original Title: Dear crypto: If you want to beat Wall Street, focus on treasury management Original Author: Matthew Liu, Partner and CSO at SynFutures Translation: Qianwen, ChainCatcher

Financial giants are entering the scene one after another, and crypto natives are facing a "life and death" moment.

An increasing number of traditional financial institutions are venturing into the cryptocurrency market, bringing significant changes to the crypto landscape. Take PayPal as an example; it launched its own stablecoin in August 2023, becoming the first major financial company in the U.S. to do so, marking an important milestone.

Another noteworthy event is that the U.S. Securities and Exchange Commission accepted BlackRock's application to issue a Bitcoin ETF in July 2023. Although the application has not yet been fully approved, this move signifies the growing recognition of cryptocurrency as a legitimate asset class (even if only temporarily).

This emerging wave clearly demonstrates that the mainstream financial sector is increasingly accepting cryptocurrencies. If these relatively nascent crypto-native institutions wish to maintain momentum and continue to grow, they must be prepared to compete with traditional finance.* At this moment,* cryptocurrency companies should learn from Wall Street's practices to manage their company funds effectively.

Equally important is that regulators are closely monitoring the cryptocurrency space. Issues in fund management at exchanges are like waving a red flag in front of a bull (the regulators), leading to stricter scrutiny. Cryptocurrency companies, facing a constantly changing financial environment, must not only consider their own interests and ensure sound fund management practices but also be mindful of the heightened vigilance from regulators.

What can we learn from history?

The development of the cryptocurrency industry over the past decade has taught us an important lesson—early crypto startups suffered painful lessons due to deficiencies in finance, management, and legal aspects.

These crypto institutions have navigated a challenging path through the fog of financial missteps, regulatory challenges, and scandals, forging their resilience and adaptability.

In May 2022, the collapse of Terra and LUNA was seen by many as the first large-scale bank run in the cryptocurrency space. This disaster devastated the entire industry and exposed significant flaws in managing counterparty risk. Another example is the cryptocurrency exchange FTX, which filed for bankruptcy in November 2022.

The collapse of FTX is a stark case of poor financial management. The risky financial behaviors of many clients of crypto startups exacerbated the issue. Many clients did not diversify their funds across different exchanges or keep their assets in self-custody accounts but instead entrusted their assets entirely to FTX, worsening the impact of the collapse.* These incidents* highlight the necessity of improving risk management and diversification strategies within the crypto ecosystem.

Despite recent progress in regulatory compliance, security measures, and investor protection within the cryptocurrency industry, these events, along with others occurring globally, underscore the need for significant improvements in fund management practices.

What can Wall Street teach us?

Effective fund management is a key factor determining the success of crypto institutions.

At the core of fund management is managing cash flow, assessing and mitigating risks, strategically investing assets, and ensuring compliance with regulatory reporting agreements. These processes may sound tedious, but given the unique challenges faced by cryptocurrency companies—including extreme market volatility, regulatory uncertainty, and tricky liquidity management—along with the growing existential threat from Wall Street financial firms in the crypto space, it is essential to develop strategies to maintain financial stability.

The persistent uncertainty in the cryptocurrency field underscores the necessity of sound fund management practices, including diversification, risk assessment, and hedging strategies. Asset diversification and rigorous risk assessment can mitigate the inherent volatility of the cryptocurrency space, while effective hedging can provide additional protection. No innovation can replace these core financial principles.

The same principles from traditional financial asset management practices can be directly applied to the cryptocurrency sector. For crypto institutions, a crucial step is to adopt a risk-based fund management approach, systematically assessing potential risks and returns to make informed decisions aligned with their objectives.

Another consideration is collaborating with third-party vendors. This is vital for fund management services, including cash management and risk mitigation. Leveraging the expertise and resources of individuals or organizations can also provide advantages to businesses. Similarly, we need to recognize the importance of collaboration between financial professionals and technical experts. Cooperation can enhance the efficiency of fund management, and interdisciplinary integration can help businesses achieve comprehensive success.

If native cryptocurrency companies do not adopt a more proactive approach to fund management, the evolving cryptocurrency market will struggle to sustain itself. By combining traditional financial wisdom with the unique dynamics of cryptocurrency, businesses can establish a solid financial framework to help them navigate uncertainty and seize opportunities.

Failing to do so, cryptocurrency companies risk repeating past mistakes, which could lead to financial instability, loss of user trust, and ultimately, company failure.