The first step in developing a baseline for treasury digital asset risk management is the identification of potential risks that can adversely affect the organization. Incorporation of digital asset processes bears various risks, which emphasizes the importance of implementing and adhering to a broad risk management plan. The key risks to identify are liquidity, concentration/counterparty, regulatory, operational, market, and reputational risks. Treasurers have a responsibility to perform adequate risk identification procedures before moving into the next phase.

The next step in the risk management process is assessment, which consists of four main parts— quantification, likelihood, impact, and prioritization. Treasurers interested in digital asset capabilities should determine which digital assets are viable options for their unique business and assess those risks accordingly. After risks have been identified, treasurers quantify risk (where possible) to assess the notional amount at stake. Assessing risk may lead organizations to analyze and identify potential hazards should one occur. The potential for interruption of sensitive business processes is evaluated by the overall capacity of risk an organization carries, which can be remediated through additional risk management strategies.

The third step in the risk management process is implementing strategies to mitigate the identified and assessed risks and the subsequent continuous monitoring of those risks. Risk identification and assessment are the building blocks for risk mitigation and monitoring and provide a tactical approach to developing various methods to reduce threats or risks. Mitigation and monitoring strategies include incorporating treasury controls, ensuring the organization has the correct human capital and system automation to support innovative digital asset processes, and understanding the given liquidity of the business at any point in time.

To ensure proper credit facilities and backup financing are in place, multiple counterparties can be utilized in case digital asset allocations cannot be accessed. In the event of financial losses or illicit activities, automated parameters can be set through ratios or balances to highlight scenarios and sensitivities with non-base case effects. By applying this sort of logic to the overall mitigation and monitoring process, a treasurer can be better equipped to handle the nuances and inefficiencies that can occur with digital assets, deter illicit behavior, prevent massive financial losses, and further adversely affect the business.

The final step in the risk management process is communicating the overall results and generating reports based on the risks taken. Treasurers should be able to relay the outcomes to management and other individuals, such as the CFO, within the organization as well as externally to stakeholders if necessary. By reporting these outcomes on risk exposures, mitigation strategies, dollar impact, and so forth, treasurers can create an “audit” trail and a record of progress in addition to bolstering transparency and accountability. Communication and reporting considerations include both financial and non-financial aspects. This final step brings together the risk management process in a cohesive manner.

Once issued, the new crypto asset ASU (Accounting Standards Update - Subtopic 350-60) proposed by the Financial Accounting Standards Board (FASB) will have a significant impact on companies holding digital assets in their treasury. Once issued, the new digital asset ASU will provide greater clarity and transparency into how companies account for and manage their digital asset holdings requirements (DISCLAIMER – Final standard expected soon).

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Treasury functions need to evaluate the risks associated with their chosen custody solution. Additionally, a System and Organization Controls (SOC) report over the custodian’s controls should be assessed regularly to ensure that the custodian is addressing risks identified by the treasury function.

A treasury function may utilize reports from a custodian, sub-ledger solution, or third-party blockchain reader. The SOC report of a reporting solution can provide assurance that the controls are operating effectively and that standard reports are accurate and complete. Key queries, fields, and parameters used by a treasury function should be compared to the SOC report to ensure they are addressed and covered by the organization’s controls. The treasury function can enable key segregation of duties and logical access management controls in place to ensure the right users are accessing the correct data and the proper counterparts have the correct decision and reporting capabilities.

In accordance with US Generally Accepted Accounting Principles (GAAP), the fair value of an asset should be derived from its principal market (the market with the greatest volume and activity for the asset). The validity of the data coming from the principal market should be evaluated by the treasury function for reliability and accuracy. If principal markets are not available, GAAP further indicates that valuation should be derived from the most “advantageous” market, in which digital assets should be compared on a level I, II, or III input basis to determine an accurate comparable, such as identical digital assets in inactive markets or similar digital assets in active markets and so on.

Implementing processes to manage tax basis tracking and recovery on disposition is essential to mitigate undesired tax outcomes. Further, using hedging instruments on digital assets and other methods of mitigating risk associated with price volatility may impact the taxation of the underlying digital assets. Digital asset ecosystems offer novel tools such as DeFi platforms, which may be an efficient way to earn a return on treasury assets; however, these constructs may result in undesired tax implications, making it necessary to analyze and understand how these activities may be treated for tax purposes.