In recent years, digital assets, such as cryptocurrencies, have moved into the mainstream. While Bitcoin was originally designed to act as an alternative to traditional finance (TradFi), major financial institutions are now moving into the space and taking advantage of the opportunities and benefits that blockchain technology offers.

The emergence of crypto ETFs and digital asset treasury (DAT) companies is a sign of crypto’s growing acceptance. Like crypto ETFs, DATs are designed to provide access to and ownership of crypto without an individual or organization needing to directly hold and secure it themself.

The concept of a treasury company didn’t originate with digital assets. Traditional treasury companies manage financial instruments, such as bonds, cash, and other fiat assets, for their customers. They are responsible for day-to-day management and partner with banks to safeguard securities.

A DAT company performs a similar role but focuses on crypto assets rather than fiat ones. 

Examples include:

• Cryptocurrencies

• Stablecoins

• Tokenized real-world assets (RWAs)

• Non-fungible tokens (NFTs)

MicroStrategy is a famous example of a DAT company. While the organization originally focused on software development, its pivot into buying and holding Bitcoin has caused its value to skyrocket.

The focus of a DAT company is to hold digital assets, enabling other investors to gain exposure to these by buying equity or stock in the company. 

Some of the actions that a DAT company may perform include:

• Digital Asset Management: DAT companies use self-custody or use a crypto custodian to secure client assets. Additionally, they may develop and implement strategies for investments and yield generation via decentralized finance (DeFi) protocols.

• Liquidity Management: The DAT company is also responsible for ensuring that it maintains sufficient liquidity in terms of digital assets. This could include converting between various tokens and purchasing or selling them for fiat currencies.

• Compliance and Risk Management: DAT companies are subject to various regulatory requirements, such as implementing anti-money laundering (AML) and know your customer (KYC) policies. In addition to maintaining compliance with applicable regulations, these organizations also secure their digital assets against fraud and cyber threats.

• Reporting and Transparency: DAT companies may generate reports regarding their asset holdings for stakeholders and regulators. This includes on-chain analytics, real-time reporting, and financial statements describing the organization’s holdings of financial assets and how they have performed within a period.

A DAT company’s core purpose is to invest in digital assets, taking advantage of the growth potential that they hold. Investing in a DAT company offers individuals and companies the ability to gain exposure to digital assets while taking advantage of the expertise and services of an expert in the space. 

Some of the key benefits that working with a DAT company can provide include:

• Access to Crypto Assets: Traditional treasury companies are typically focused on fiat-based assets and may have little or no exposure to crypto. Investing in a DAT company enables an organization to take advantage of this new asset class.

• Crypto Management Expertise: While an organization can own digital assets directly or via a traditional treasury company, it may lack the expertise needed to manage and invest them effectively. A DAT company should have deep knowledge of the Web3 space and will likely be able to leverage this in their investment strategies..

• Greater Financial Resiliency: Organizations only holding a few different types of assets, such as only fiat-based assets, may be vulnerable to inflation or market crashes. Expanding to hold digital assets as well enables the company to further dilute its risk because the values of these assets are less tied to that of fiat currencies than many traditional assets.

• Enhanced Security: An organization that manages crypto assets should implement security best practices, such as the use of multi-sig and cold wallets, that reduce the risk that an organization’s digital assets will be stolen in a hack. Investing in a DAT company may provide better protection for an organization’s money than holding digital assets directly.

• Simplified Compliance and Reporting: Regulatory compliance and reporting can be complex for digital assets, especially since laws vary across jurisdictions and are still evolving. DAT companies will keep abreast of evolving requirements and ensure that they are in compliance and have the documentation and reporting necessary to demonstrate this fact.

Investing in DAT companies enables organizations to expand their asset holdings by allowing them to branch out into digital assets. 

However, to do so, DAT companies need to overcome certain challenges, including:

• Regulatory Requirements: Regulation in the Web3 space is frequently changing as various jurisdictions decide to be pro- or anti-blockchain, potentially switching their stances amid changes in administration. DAT companies need to track and navigate these changes to ensure that they are compliant with applicable laws and standards.

• Asset Volatility: Digital assets are notoriously volatile, offering the potential for significant returns or major losses. DAT companies need to implement investment strategies that maximize returns while operating within their risk appetite, which requires extensive knowledge of crypto markets and projects.

• Digital Asset Security: Crypto hacks are a common occurrence, and attackers commonly target organizations with large holdings of digital assets, such as exchanges. DATs will face similar risks and need to implement security best practices both on-chain and off-chain to properly protect their assets.

• Technological Evolution: Web3 is a fast-moving space with new projects, updates, and technologies being released on a regular basis. DAT companies need to keep abreast of the current state of the art to ensure that they optimize investments in digital assets.

DAT companies offer organizations the opportunity to expand their asset holdings by branching out into digital assets. However, while digital assets offer numerous potential benefits, they also carry risk. In addition to volatility, hacks are common in the crypto space as attackers take advantage of weak on-chain or off-chain security.

Halborn offers security advisory services to help ensure that an organization managing digital assets implements security best practices. For assistance in ensuring the security of your customers’ assets or validating a DAT company’s security as part of due diligence, get in touch with Halborn.