Navigating Web3 Treasury with Rohit Goel from Protocol Labs

[00:00:00] Rohit Goel: Most web3 companies with open source software don't have conventional sources of revenue. So in web3 companies, treasury takes on a much more crucial role in the organization as it's responsible for generating revenue.

[00:00:15] Rohit Goel: Whether it's via token sale programs, by staking tokens or other investment strategies.

[00:00:21] Rohit Goel: The second big difference is web3 treasuries have a token heavy balance sheet, which can experience massive volatility in the value of assets as the market fluctuates. So how to dampen this volatility is a very difficult problem to solve.

[00:00:37] Rohit Goel: We've had some success with it, you know, using options.

[00:00:41] Rohit Goel: And then lastly, so web2 treasuries are typically staffed with experienced people from banks and hedge funds, whereas in web3, sometimes there is no headcount dedicated to treasury management at all.

[00:00:54] Umar: Welcome to The Accountant Quits podcast where we help accounting and finance professionals learn how to manage a business using crypto.

[00:01:02] Umar: Rohit Goel has been the Treasurer of Protocol Labs for the past five years, the creators of Filecoin and IPFS.

[00:01:10] Umar: As the first treasury hire, he built their treasury function from scratch with a billion dollar in assets and transformed treasury into a revenue center by deploying low risk options strategies on crypto assets.

[00:01:23] Umar: Rohit, what are some of the best practices for web3 treasury management? 

[00:01:28] Rohit Goel: I would start with liquidity management, so maintain 18+ months of runway in fiat or stablecoins. There should be definitely certain allocation to stablecoins. Because they improve operational efficiency by eliminating banking delays or they facilitate cheaper cross-border payments.

[00:01:46] Rohit Goel: The next important topic is asset diversification, especially web3 projects where their treasury is concentrated in their native token. We try to diversify away from the native token into reserve assets like Bitcoin and Ethereum.

[00:02:03] Rohit Goel: And speaking of native tokens, wallet hygiene for the native tokens is very important, so one should have separate wallets with separate permissions for different groups of people based on the intended use of the token.

[00:02:19] Umar: In this episode with Rohit, we'll unpack fundamentals of the treasurer role, principles for building a strong web3 treasury, web3 treasury in practice from designing wallet based controls, setting exposure limits across DeFi, building yield strategies and much more.

[00:02:38] Umar: And before we dive in, a quick note about The Accountant Quits community platform for web3 accounting and finance professionals.

[00:02:46] Umar: Inside the platform, you can connect with peers working in web3, join focused chat groups, access job opportunities and attend practical workshops on web3 finance.

[00:02:57] Umar: You can join for free by heading to theaccountantquits.com/courses and selecting free membership. The link is also in the show notes.

[00:03:06] Umar: Lastly, if you're new to this channel, make sure to like this video and subscribe.

[00:03:10] Umar: It really helps us to grow the channel and spread our message to more finance professionals.

[00:03:16] Umar: Now, let's get into my conversation with Rohit.

[00:03:23] Umar: Rohit, welcome the show and thanks for making the time to be here.

[00:03:28] Rohit Goel: Absolutely, Umar. Thanks so much for having me on this podcast. Looking forward to our conversation. 

[00:03:33] Umar: So, to start, Rohit, can you please share your background, how you became interested in blockchains a long time ago now, and maybe the story becoming the Treasurer of Protocol Labs back in 2021.

[00:03:47] Rohit Goel: Yeah, absolutely. So I started my finance career at a hedge fund in the Midwest in US. Initially I was part of the corporate finance function and subsequently moved to a trading role, focusing on finding arbitrage opportunities in the fixed income market. After a few years, I moved to the Bay Area where I'm still based.

[00:04:08] Rohit Goel: And joined a small RIA Registered Investment Advisor as the Head of Portfolio Management and Trading. And eventually I decided to pivot into treasury and held senior treasury roles at various Bay Area tech companies. And about four and a half years ago, Protocol Labs who's the creator of Filecoin.

[00:04:29] Rohit Goel: And IPFS as you mentioned reached out to me asking me if I was interested in building their treasury. And I did some research into the company. I was very impressed with their mission, with the caliber of the people, the potential of Filecoin. So yeah, I've been in the web3 space since 2021.

[00:04:49] Rohit Goel: And before that, I should mention that one of my really close friends who's been mining Bitcoin since 2013, he was the one who initially got me interested in crypto. So I started trading crypto in my personal account in 2017 and went down the rabbit hole of trying to understand various projects and protocols and then took the leap into the space full-time in 2021.

[00:05:12] Umar: So before we zoom in into web3 treasury, I wanna start with the fundamentals. You've managed treasury, like I said in the intro at a large hedge fund, web2 companies like Zendesk, one of the biggest customer service softwares, and you're now at Protocol Labs. So you've seen this role from different angles.

[00:05:32] Umar: If you had to explain to someone what the role of a Treasurer actually is, regardless of web2, web3, how would you break it down and maybe what the main focus areas would be? 

[00:05:43] Rohit Goel: Yeah, so people often ask me, what does treasury do? And my response is that there is a there are four main pillars or focus areas within treasury.

[00:05:53] Rohit Goel: The first area, which is the foundation of treasury is operations. And there's a long list of items here. Liquidity management and intercompany funding is the most important one, which ensures that all bank accounts and subsidiaries, especially those that are international have adequate working capital, crafting disbursement policies for cash and token payments is also very important.

[00:06:17] Rohit Goel: These establish internal controls for payments in order to mitigate fraud, minimize errors and improve efficiency. Developing forecasting models for cash and token flows and a lot of accountants will be familiar with these forecasting models. They can help the company have medium term visibility into their projected cash and token balances.

[00:06:38] Rohit Goel: Creating cash and token reporting dashboards is also key from the perspective of senior management and the board because they want to know where all the liquid assets are at any given point. And bank and custodian relationship management is also another big item within operations. So treasury is typically responsible for selecting the banking and custody partners, setting up the account structure, configuring user access, and last but not least, is implementing treasury management systems and other process automations.

[00:07:14] Rohit Goel: The second focus area is financial risk management, and the most key item here is hedging different types of financial risks such as FX risk, interest rate risk and market risk.

[00:07:28] Rohit Goel: So let's dive into each of these and it's important to keep in mind that this requires a deep understanding of derivatives, such as options, futures, and forwards. Let's talk about FX risk. And this is more relevant for public companies in the web2 space. When they have significant operations internationally, movements and FX rates can cause the USD equivalent value of the billings and expenses to fluctuate creating noise in the financial statements. So Treasury typically owns the responsibility of hedging the FX risk to reduce, this noise.

[00:08:05] Rohit Goel: Interest rates are a significant and often underappreciated risk for companies that either hold long-term bonds as investments or have borrowed funds with a floating coupon.

[00:08:17] Rohit Goel: The thing to remember is that bonds, the bond prices move inversely to interest rates. So if interest rates rise, bond prices drop, and treasury is responsible for managing this risk, which if not hedged properly, in the worst case scenario, cause companies to go bankrupt? Think about what happened in early 2023 when several mid-tier banks blew up for this exact same reason.

[00:08:44] Rohit Goel: The last one here is market risk, which varies by industry. So the biggest market risk for airlines is fuel prices. A big market risk for car manufacturers is prices of materials. Bringing this back to web3, the biggest market risk for web3 companies is token prices because fluctuations in the market can cause massive volatility in the balance sheet.

[00:09:09] Rohit Goel: So treasury is typically entrusted with hedging all of these risks and they involve derivatives as I mentioned earlier.

[00:09:16] Rohit Goel: So the second item within this area is counterparty risk assessment.

[00:09:23] Rohit Goel: And the third one is establishing controls, limits, separation of duties. We'll dive into both of these a little bit later. So let's put these on the back burner for a few minutes.

[00:09:32] Rohit Goel: The third focus area is financing which can be either debt or equity. So treasury typically leads the conversations with the CFO on what the optimal capital structure looks like, which essentially means how much debt should the company have in relation to its equity.

[00:09:50] Rohit Goel: And the next question is how much of that debt should be short term, such as bank loans, credit facilities, commercial paper versus long term which can be margin loans, convertible debt, corporate bonds. Treasury is also responsible for selecting the counterparties, negotiating the terms and covenants.

[00:10:08] Rohit Goel: And once the debt is in place ensuring that the firm is complying with the debt covenants at all times.

[00:10:15] Rohit Goel: On the equity side, again, maybe not a topic that's super relevant to web3 but I talk to a lot of web3 leaders and CFOs, and some of them have started thinking about going public.

[00:10:27] Rohit Goel: So maybe this will be become more relevant for web3 as well. So on this side, treasury is deeply involved in the IPO process and secondary stock offerings.

[00:10:36] Rohit Goel: And the final area within this list is investments which entails investing the firm's liquid assets in a thoughtful manner without taking on excessive risk.

[00:10:50] Rohit Goel: So treasury typically creates the investment policy statements, selects the investment managers, monitors the performance of the managers, and then if applicable, it also runs stock buyback programs or token buyback programs.

[00:11:04] Rohit Goel: So those are the four main areas within Treasury. So hopefully that gives you a sense of the breadth and depth of treasury in a large organization.

[00:11:13] Umar: Great. So now I'd like to move on comparing treasury management in web2 versus web3. So treasury, a treasury at a high level, whether web2, web3, they do share the same mission. They should be structured to exist in perpetuity. Their job is to protect liquidity, manage risk, and extend runway so the organization can survive and operate for the long term, right?

[00:11:37] Umar: So when you moved from the web2 companies into web3 now at Protocol Labs, what were the biggest differences that actually changed how you did your day-to-day job? And just to clarify for the listeners Protocol Labs are the creators of Filecoin and Filecoin also has a native token.

[00:11:56] Rohit Goel: Yeah, great question Umar.

[00:11:58] Rohit Goel: So web2 treasury management is relatively straightforward and as you correctly pointed out Treasury's main mandate is to safeguard the company's assets, ensure that there is ample liquidity and that all financial processes are running smoothly. However, most web3 companies with open source software don't have conventional sources of revenue.

[00:12:23] Rohit Goel: So, in web3 companies, treasury takes on a much more visible and crucial role in the organization as it's responsible for generating revenue whether it's via token sale programs, by staking tokens or other investment and we'll double click into this topic a little bit later in the call, but I think this is the most crucial difference between web2 and web3 treasuries.

[00:12:47] Rohit Goel: The second big difference is that, as we discussed earlier web3 treasuries have a token heavy balance sheet which can experience massive volatility in the value of assets as the market fluctuates. So how to dampen this volatility is a very difficult problem to solve. We've had some success with it, using options but still, we are still, we still continue to work on this topic to get, better and better over time.

[00:13:15] Rohit Goel: And then lastly, this is more a general comment about web3 treasuries. So stepping back from Protocol Labs. So web2 treasuries are typically staffed with very skilled and experienced people from banks and hedge funds. Whereas in web3, sometimes there is no headcount dedicated to treasury management at all.

[00:13:34] Rohit Goel: And even if there are some people, they are typically not experienced in risk management strategies in general and specifically derivative strategies, that are required for some of the more sophisticated treasury tasks, such as hedging and investments. So hopefully that makes sense. Happy to answer any questions or double click into any of these areas about what makes web3 treasuries more challenging.

[00:13:59] Rohit Goel: But from my perspective, more interesting and exciting as well. 

[00:14:02] Umar: Yeah, I would agree. It's more interesting. So let's move on to some of the good principles for building a strong web3 treasury and I want this topic to be aimed at a specific listener. Maybe this person has just joined a web3 company after a Series A or after a token launch.

[00:14:21] Umar: The treasury of this company used to be handled by the CEO, but now it's on them. Now they're sitting on a mix of bank accounts and crypto across different wallets. Maybe they have a multisig, maybe they have a custodian, like a Fireblocks, Anchorage, or BitGo. So they're being asked to make this treasury now a bit more professional.

[00:14:41] Umar: So before we get into controls later during this episode, I wanna ask you, what are maybe for you, some non-negotiable principles for building a strong web3 treasury from that starting point for that person? And if you can make it a bit practical, what would you put in place for the first 30 to 60 days?

[00:15:01] Rohit Goel: Yeah, absolutely. Umar, I mean this goes to the heart of best practices within treasury management. So I would start with liquidity management because that should really be the number one focus area for any treasurer. So maintain 18 plus months of runway in fiat or stablecoins. Doesn't matter whether you're web2 or web3.

[00:15:21] Rohit Goel: This is a non-negotiable and then bringing it closer to web3 there should be definitely certain allocation to stablecoins because they improve operational efficiency by eliminating banking delays or they facilitate cheaper cross-border payments. But it's important to only allocate to stablecoins that are fully backed and transparent.

[00:15:42] Rohit Goel: I mean, we have had so many examples of stablecoins that have depegged or blown up in other ways. So you don't want to be taking unnecessary risks with your company's lifeblood.

[00:15:53] Rohit Goel: The next important topic is asset diversification. Especially web3 projects where their treasury is concentrated in their native token.

[00:16:03] Rohit Goel: This is a very important best practice to try to diversify away from their native token into reserve assets like Bitcoin and Ethereum and there could be a certain amount element of market timing involved here, where, you know, the token price rallies, they sell some, and then if there is a drop in the markets, they allocate that to Bitcoin and Ethereum.

[00:16:25] Rohit Goel: How they want to do it, that's up to them. But longer term, it's not a good idea to have a huge amount of concentration to their own token even if they believe in it, believe in the project a hundred percent. Just from a risk management perspective that's not a good idea.

[00:16:41] Rohit Goel: And speaking of native tokens, wallet hygiene for the native tokens is very important. So, one should have separate wallets with separate permissions for different groups of people, based on the intended use of the tokens. So there should be separate wallets for ecosystem initiatives, investments, treasury projects that just most of your audiences are accountants, so I'm sure they understand how important it is to keep the tokens for different purposes in different places so they can track their usage and rewards generated properly and that basically leads to cleaner bookkeeping.

[00:17:21] Rohit Goel: A topic that's close to my heart is having cost-effective financing solutions in place. And this is something that not a lot of people within web3 pay much attention to. So I think it's important to proactively find lenders who are good fit for the business, negotiate pricing and terms, and then execute necessary documents such as master loan agreements.

[00:17:45] Rohit Goel: And sometimes these docs can take up to three months to negotiate and execute, because if you suddenly realize that you need cash, then the choice becomes, hey, do I fire sell some tokens, or if I have access to financing, do I tap that financing? I would think that the answer in most cases would be tap that line of financing.

[00:18:07] Rohit Goel: But you have to do work beforehand to have those financing options available so you can access them quickly if there is an urgent need for cash. 

[00:18:18] Umar: Can I interrupt you on this one? What's a good example there? 

[00:18:21] Rohit Goel: Yeah, absolutely. So there are again. The simple loans within the web3 space are sort of margin loans.

[00:18:30] Rohit Goel: So for example, if the choice is, do I sell my, let's say token prices have dropped the company suddenly needs cash. Now the choices, do you sell your tokens or do you access financing? So if you believe your token is undervalued again, I should preface this by saying that, this is not investment advice, but if you believe that your token is undervalued and you don't think this is a good time to sell your token, then it would make a lot more sense to use those tokens as collateral to borrow dollars and then, if the market moves in the desired direction, prices go higher, you can unwind the loan and sell tokens.

[00:19:13] Rohit Goel: But again, as they say, there is no free lunch in finance, let's say. You believe your token is undervalued. You would rather not sell it, but, use it to borrow some dollars or any other fiat under a margin loan structure.

[00:19:28] Rohit Goel: But then the token price drops further and you get a margin call. So, there are risks involved in these strategies. So one always has to consider the pros and cons. Hopefully that answers your question.

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[00:21:18] Umar: Perfect. Thanks for sharing. I'm sure the listeners would always appreciate to have those practical takeaways. Now I wanna move on to another

[00:21:27] Rohit Goel: Sorry to interrupt Umar, there's just one last best practice within my list and I'll quickly go through that. And that's and it's really important and this is the best practice for potentially extending the company's runway. So we think that the endowment portfolio approach makes a lot of sense. What this means is structuring the investment portfolio such that the principle invested is preserved in real terms. So you never sell any assets and you use a portion of the returns to fund the organization's ongoing  OpEx.

[00:22:00] Rohit Goel: A good example of this approach is endowments at IBD universities such as Harvard and Yale. So just something to think about. It's I don't think any web3 treasury has solved this problem yet, but I think this is a good approach for thinking about how to invest one's assets and potentially extend the runway significantly.

[00:22:22] Umar: What you just described, would that be what active management of a treasury looks like? So using the returns generated by the investment to fund the operating, needs of the company? 

[00:22:37] Rohit Goel: Well, it doesn't necessarily have to be active management. So, the simple equation is what's the size of your assets and how much return can you generate on those assets? And then, so A is your size of assets, B is the potential return that you can generate every year. So A times B, how much cash does that portfolio generate? You know, is that enough to cover your ongoing expenses? And then if the answer is no, then you know, potentially you need to take slightly more risk in the portfolio to generate higher turn.

[00:23:11] Rohit Goel: And then you're moving towards the active management approach, which I don't necessarily recommend, but the, to answer your question, it doesn't necessarily imply active management. It just, it implies, just changing how one thinks about investing their assets and some of it can be done internally by the treasury staff.

[00:23:33] Rohit Goel: For others you might need to hire professional investment managers. So, you know, that's a whole different discussion.

[00:23:40] Rohit Goel: But it's more about that mindset that, if you have native tokens, if you are selling those tokens, you are potentially putting pressure on the price of the tokens and you don't have an unlimited supply of those tokens.

[00:23:52] Rohit Goel: So it's more about shifting your mindset about how can you potentially, get to infinite runway by investing your assets in such a way that you are never selling them. Just the returns, continue to fund the operations of the organization on an ongoing basis. So again, it's, I don't think anyone has solved this problem yet, it's a good way to structure this problem and think about it.

[00:24:17] Umar: Perfect. Thanks for clarifying Rohit. Now a lot of our listeners, they're sitting on quite significant balances with a mix of fiat, stablecoins, native tokens. But they don't really have a dedicated treasury team. Oftentimes it's one to two person finance team, they're doing payroll, they're doing month close, reporting, but now they're also being asked to go and earn yield in DeFi.

[00:24:42] Umar: I wanna ask you, how should these finance teams think about building a diversified portfolio, including stablecoins and volatile tokens? Should they actually outsource this function to a professional investment manager? Maybe that's the first question, and then I'll have a follow up question.

[00:25:00] Rohit Goel: Sure. Yeah. So this builds nicely on what we just discussed, and again nothing we discuss here should be considered investment advice. I'm just sharing what I've learned from my own experiences in web2 and web3.

[00:25:13] Rohit Goel: So let's analyze this along three main kinds of assets that web3 treasuries hold: US dollars or fiat, stablecoins and tokens.

[00:25:23] Rohit Goel: So again, these are like. Some very, I'm starting with very basic principles that are used in web2 all the time. And then I'll sort of focus more on web web3. So starting with US dollars. So ensure that the funds in the bank accounts are swept overnight into money market funds. This ensures that not only are you earning a competitive return on your cash, you know, right now you can potentially generate between 3.5 to 3.75% annualized return on cash.

[00:25:53] Rohit Goel: But, it's key to understand that if your cash is swept overnight into a money market fund, then you're also sidestepping the credit risk of the bank. You know, if something happens to the bank, then that cash is actually invested in a money market fund, which is a ring fence structure completely separate from the bank's balance sheet.

[00:26:12] Rohit Goel: And then one can also invest in the top money market funds and bond funds via liquidity portals that are operated by Goldman Sachs, State Street and a few other banks, and the yield for the same money market funds via these portals can be higher by 20 to 30 basis points, which might not be material if the size of the treasury in is in tens of millions.

[00:26:37] Rohit Goel: But if it's in hundreds of millions, then we are talking about some real dollars that you can pick up by investing via these liquidity portals rather than just having your funds being swept overnight. And, but I also realized that a lot of projects in the web3 space don't have access to traditional money market funds.

[00:26:56] Rohit Goel: But now I think that problem has been solved already. There are onchain money market funds, like BlackRock's BUIDL, Ondo Finance's, OUSG, which are really good options for generating yield on US dollars. And they also have sort of 24 settlements. So, those are great options for onchain treasuries.

[00:27:14] Rohit Goel: Moving on to stablecoins. So stablecoins that are part of the working capital and sitting in custody accounts. There are ways to generate yield on that as well. However, these vary by custodian. For example, Coinbase pays rewards on USDC, but Anchorage does not. So in Anchorage one can convert USDC into USDG or PYUSD, which is PayPal's stablecoin and generate a similar return.

[00:27:44] Rohit Goel: So one has to really look at which custodians they're using. What are their policies for rewards? Can they get these rewards simply by converting one stablecoin into another? And then for longer term holdings one can generate yield by lending to DeFi pools such as Maple.

[00:28:00] Rohit Goel: That's an extremely popular platform and the return there is significantly higher than that of money market funds. And the last, asset type here is tokens. So staking is an easy solution. I believe, most web3 treasuries stake their assets. But the yield and ease of execution varies widely from one token to another.

[00:28:25] Rohit Goel: And then finally, option strategies such as covered calls are also a good way to generate yield. And these strategies involve, generating premium income by selling options, and they are definitely closer to active management. So it's best to outsource these to trusted investment managers with clear guidelines and risk parameters.

[00:28:48] Umar: Have you spoken to other treasurers or not necessarily treasurers, let's say web3 teams in the industry that would basically use derivatives in-house and not outsourcing this because it, it is like quite a complex and it requires like specialized knowledge to start dabbling with derivatives.

[00:29:07] Umar: Is it always the case that this would be outsourced to like a professional service provider? 

[00:29:14] Rohit Goel: So there are two ways of doing it. You can outsource this to a professional investment advisor. So, these investment advisors have to be in the US they're called RIAs, Registered Investment Advisors, and they are fiduciary to their clients.

[00:29:29] Rohit Goel: And the documentation required to onboard these is relatively simple. So, you can hire an Investmen t Manager, they might charge you management fees. They might charge you performance fees, but then and again, there is a principle versus agent approach. So if you hire an investment manager for these type of strategies there, it'll be more of an agency setup where if you want to, let's say, put on a hedge or run a strategy to generate yield via option strategies, they'll go out in the market and try to find the best prices from their trading counterparts. And then the other approach is to execute these strategies via market makers who don't have discretion.

[00:30:13] Rohit Goel: But in the second case, you typically have to sign ISDAs with these market makers and that can be a very long and complex process. I remember that, initially it took us six months to put an ISDA in place with one of our trading partners and it's gotten better over time, but you have to be mindful of all of these, costs and prerequisites for putting these strategies in place.

[00:30:37] Rohit Goel: For example, negotiating at ISDA and that requires lawyers who are experts in these types of documents. So yeah, it's not only time, but also money that needs to be invested into putting these relationships in place and then with market makers, you have what's called the principle setup where the market maker is taking the other side of the trade, but then they don't have any discretion, so you have to basically direct all of the trades. So I would definitely not recommend this setup for folks who don't have expertise in derivatives.

[00:31:12] Rohit Goel: So best to outsource this to an investment manager who has discretion and you just give them, the guidelines and a risk framework and then they operate within that, but then they have discretion to in terms of how to structure the trades with which counterparties, quickly take evasive action if the market is moving in the wrong direction, et cetera.

[00:31:33] Umar: Now Rohit, one of my follow up question was around monitoring your position. So let's say you've deployed the treasury across DeFi, you've staked your tokens, now you have to monitor your position. In web3, we have amazing transparency. We also have a lot of noise. So how do you set up an onchain monitoring so you are getting insights from your position, and I know that there are certain tools like Hexagate, they help you to with your onchain risk monitoring. I wanna ask you if you've previously used tools like this or how would you set up like an alert system? 

[00:32:13] Rohit Goel: Yeah, that's a good question. And, before I answer that, let me quickly talk about sort of position limits and protocol caps, because that's an important part of risk management for the investment portfolio.

[00:32:24] Rohit Goel: And a simple risk management metric is that the allocation to any strategy or partner should not exceed 10% of the assets, and then the allocations should not exceed 10% of the protocols, AUM or TVL. So we track these allocations on a weekly basis and rebalance if the allocations breach these limits.

[00:32:45] Rohit Goel: And then regarding monitoring, I agree that it's difficult for a small treasury or finance team to stay on top of things 24/7 and take protective actions quickly. So we have looked into tools such as 1Token and Octav, which is O-C-T-A-V, who I believe you're familiar with. But ultimately we decided to go in a different direction.

[00:33:08] Rohit Goel: So as I've mentioned a few times. During our conversation today, that all of our DeFi allocations are via professional investment managers. So they have DeFi experts on their staff. They have deep relationships with the various protocols. They are monitoring, everything on a 24/7 basis to see if any stablecoins are depegging, or if there's a hack in one of the protocols and they can move quickly and they charge us a nominal fee for generating a healthy risk adjusted return. So we really like this setup because the treasury has 15 other things to focus on. So, we would rather outsource this to experts who do this on a daily basis.

[00:33:51] Umar: Yeah, I agree. Now, and for the listeners, one of those companies you mentioned before was Octav. Octav, I'm sure the listeners will be familiar to it. They were a previous sponsor of this podcast actually. And great so that brings me to the next topic that I wanna go through, which is on counterparty risk management.

[00:34:13] Umar: So, in crypto, the main counterparties a treasury could be exposed to would include your centralized exchange, your custodians, your stablecoin issuers, and your DeFi protocols with the risk being like the protocol risk with any smart contract exploitation.

[00:34:31] Umar: So when you're designing a treasury policy for crypto, how do you actually set exposure limits and monitoring for those kind of players and.

[00:34:42] Umar: Maybe if you can give an example of a counterparty that you say, okay, you'll tolerate risk there, and one where you say no, you will rather have zero exposure on risk and maybe why?

[00:34:54] Rohit Goel: Yeah, counterparty risk management is definitely a big topic for web3 treasuries, especially after what the industry went through in 2022.

[00:35:03] Rohit Goel: So in my opinion, here are some of the best practices for managing counterparty risk. So you can implement variable maximum credit exposure limits based on a counterparty risk assessment that you conduct internally. And this risk assessment can be a score based on various factors, some of the factors being size and scale of the counterparty.

[00:35:28] Rohit Goel: So if they have operations or presence in multiple markets around the world, that's a plus. The financial health of the counterparty. What does, what's their market cap? Total size of assets, credit rating, stock performance, if they're a public company, proof of reserves, security, do their products and systems provide strong security against hacks and breaches?

[00:35:48] Rohit Goel: Are they rated highly by third party security assessment companies? The reputation of the counterparty. Do they have a history of lawsuits, fines, allegations of illegal conduct, you definitely want to stay away from those. And then client feedback is important. Before onboarding a new counterparty, I always like to get feedback from their existing clients in terms of their products and services.

[00:36:12] Rohit Goel: So using these various metrics. You can create a score that you assign to each of the counterparties. And then the next thing here is diversification and redundancy. So I talked about like how you analyze each counterparty, you assign a score to them. And then you also want to make sure that you're setting up relationships with at least three counterparties for each area of treasury.

[00:36:37] Rohit Goel: This prevents any one counterparty from having insight into everything that you're doing, and also provides vital redundancy and avoid relying too much on any one counterparty for multiple treasury functions. And then meet with these counterparties formally at least once a quarter to get an update on their business and update their credit score assessment.

[00:37:00] Rohit Goel: So again, it's not rocket science, but if you follow this approach diligently. You can be aware of the risks that you have with the various counterparties and stay in touch with how things are evolving over time. And regarding your question about the one counterparty that I'll tolerate risk with, and I would say that is custodians because the 10% of assets limit I mentioned is not practical for custodians because that would mandate having too many custodians. So I would definitely make an exception for custodians.

[00:37:34] Rohit Goel: And then the one counterparty that I'll never accept exposure to would be DeFi protocols that have very small TVL or have not passed the required security audits and our investment managers typically conduct exhaustive due diligence of various DeFi protocols before they allocate our assets to them. 

[00:37:55] Umar: Perfect. That was clear. Now I want to move on to the next topic for today, which is more on governance and internal control.

[00:38:05] Umar: So, in web3 treasury does not only arise from your market exposure, but also from an operational standpoint. And also because in web3, everything is different than TradFi.

[00:38:17] Umar: So meaning how payments are executed, who's got wallet access, and basically what different guardrails you have around your onchain activity.

[00:38:27] Umar: So if you were helping a web3 project on their internal controls, when, let's say it comes to payments, how would you structure different roles and responsibilities, the approval workflows, who has wallet permission, spending limits reporting, like all of those, and should all of these usually be formalized into a document?

[00:38:50] Rohit Goel: Yeah, absolutely. So, and this is a pretty standard practice within treasury. At least in web2, every treasury has a disbursement policy, which sort of fleshes out all of these controls and it's reviewed by the finance leadership once a quarter, once every six months.

[00:39:08] Rohit Goel: And we have a similar disbursement policy in place at Protocol Labs as well. So as I mentioned earlier, the objective of establishing these controls is to mitigate fraud, which is obviously a huge concern in web3, minimize errors and improve efficiency for payments. So, segregation of duties, in my opinion, is very important for this.

[00:39:30] Rohit Goel: So no single user should be able to both initiate and approve transactions or modify access controls by themselves. You mentioned transaction limits. So, one should have daily and per transaction thresholds by user, wallet type or currency. Whitelist are very important to minimize errors, pre-approved counterparties addresses or exchanges should always be whitelisted.

[00:39:56] Rohit Goel: And, you know, any large transfer should always be made to whitelisted addresses rather than sending them to one-time addresses.

[00:40:04] Rohit Goel: Approval matrix is absolutely key which basically dictates how many approvals you need for a transaction. And typically the higher the value of the transaction, the more approvers you need.

[00:40:16] Rohit Goel: You can implement time delays for really large transfers so that the systems put a 12 hour or 24 hour block before a very large transfer is released in case there is some fraud in play. You can have geo and IP restrictions, which restrict transaction initiation from specific regions.

[00:40:36] Rohit Goel: You can have audit trails. Reconciliation is very important. I think every accountant understands how important it's to reconcile bank accounts, wallet activity to make sure that there are no fraudulent transactions. And then the other area within controls is IT security or system administration.

[00:40:56] Rohit Goel: So here, it's important to use the least privileged principle, which basically means that user should be granted only the minimum access and permissions required to perform their designated tasks. When employees leave the company, their access to all of the systems should be terminated immediately and any changes to user access should be should go through dual administration.

[00:41:22] Rohit Goel: So I think these are some of the controls at a higher level, which would ensure that payments are being processed efficiently, but also eliminating any fraud. 

[00:41:34] Umar: Yeah, it's high level, but I think it's an, it's a great checklist like that you just provided Rohit, I think if the listeners just so you know, the transcript of this conversation is also available on the website of The Accountant Quits.

[00:41:49] Umar: So you can actually have a great checklist there. You can copy paste that into chatGPT, and you can build like a wallet management policy like of course you would improve it, but you have a great checklist that Rohit just shared.

[00:42:02] Umar: Now, we recently ran a workshop on how to build a real time crypto financial dashboard. The core takeaway from that was very simple. In web2, you always know your cash position. I mean, it's easy to know it. In web3, you have your wallets across different chains. You have your exchange accounts, you have your bank accounts, and of course, none of them talk to each other.

[00:42:24] Umar: So for a treasurer just to answer, hey, how much cash do we actually have today? It's not very straightforward, like it's a bit manual. So from your perspective, I wanna ask you how do you approach yeah, automating that consolidation of crypto in fiat in probably a real time fashion, if that's possible. And yeah, that's gonna be my first question and then I'll have a follow up question.

[00:42:49] Rohit Goel: Sure. As I've mentioned before it's very important for the senior leadership team and the board to have a detailed picture of the company's liquid assets. So we have developed a treasury dashboard that captures all of this information across the various programs and partners.

[00:43:06] Rohit Goel: We update the dashboard weekly. But unfortunately the process of updating the dashboard is still quite manual and we are exploring whether we can leverage Gemini which is the AI tool embedded within Google Workspace to make this process faster and less painful. So yeah, we do have a very comprehensive dashboard, but it's still lives in Google Sheets is relatively manual, but hopefully as AI gets better and we learn to use it more effectively, we can automate some of the steps within the overall process.

[00:43:43] Umar: And maybe a follow up question more broadly speaking, are there any web2 or web3 tools that you found particularly useful for managing the treasury? 

[00:43:55] Rohit Goel: Yeah. So regarding tools for treasury management, there are several good tools, on the cash side, Kyriba, HighRadius, and there are several on the crypto side, Fireblocks, BitGo, but I haven't found anything that combines both in an elegant fashion.

[00:44:10] Rohit Goel: So typically you have to run these tools in parallel, one for fiat, one for crypto, and I would love to have a tool that combines both of these. 

[00:44:20] Umar: Yeah, so at the time of this episode, we've already published this workshop. But I would actually recommend the listeners, I'm not sure if you know about this, but we have this community platform where we host monthly workshops. So for example, we just had a workshop on how to build a crypto financial dashboard using AI, and every month we'll have, we'll bring forward like a different topic.

[00:44:44] Umar: So if you want to access those, you just have to go to theaccountantquits.com/courses and you can sign up to our workshop.

[00:44:52] Umar: Now, this brings us to my last question on today's episode, Rohit.

[00:44:58] Umar: A lot of our listeners are accountants, they're finance operators, and they want to grow into more senior web3 roles.

[00:45:06] Umar: Based on your experience, what skills do you think will matter most for these web3 treasury roles, finance roles over the next few years and maybe what's becoming less important? 

[00:45:18] Rohit Goel: Yeah, that's a great question. So no one goes to school to get trained in treasury. Most treasury professionals somehow fall into the space and they love it so much that they stay.

[00:45:29] Rohit Goel: So folks who are in web3 accounting or FP&A already have the technical skills and understanding of digital asset operations to take on treasury related tasks. So my answer is gonna be a little bit different from talking about hard skills because I believe that to truly succeed in treasury, soft skills, I believe are a lot more important.

[00:45:51] Rohit Goel: So web3 treasury is a relatively new area and there are lots of difficult problems to solve. So one must be comfortable thinking out of the box and employing first principles problem solving.

[00:46:04] Rohit Goel: One must also be a strategic thinker. The outcomes of a lot of treasury initiatives are often heavily impacted by the financial markets, and no one can predict what the market is going to do.

[00:46:16] Rohit Goel: So it's important to think in terms of scenarios and proactively develop plans for each of the scenario. So even if the worst case scenario materializes one doesn't panic and can calmly execute the pre-agreed plan. And last but not least, communication and leadership skills are absolutely key. I'm definitely biased but I believe that treasury is the heart of any organization.

[00:46:42] Rohit Goel: And it works closely with internal partners such as other finance teams, legal, product and external partners such as banks, custodians, market makers, investment managers, and it's important to build strong working relationships with each of the partners, negotiate effectively with them, and be able to influence people who don't report to you.

[00:47:04] Umar: Perfect. Rohit, I've really enjoyed recording this episode today. Speaking about treasury management is one of the topics that we'll keep bringing forward in 2026. We started last year, but this has been great having you today. As it's a tradition on this podcast, when we end the episode is to ask the guest for his favorite quote or maxim.

[00:47:28] Umar: Is there anything that comes to mind? 

[00:47:30] Rohit Goel: Yeah, absolutely. I have a couple of favorite quotes. The first one is specifically for treasury, and the second is more general. So the first one is cash is king. This phrase is very popular in web2 treasuries, but not so much in web3, possibly because of a slight anti fiat bias.

[00:47:49] Rohit Goel: And I think it's important to choose pragmatism over ideology, given that a large majority of a web3 treasuries assets are in crypto and their liabilities are expenses are in fiat and this mismatch can really hurt a company if it's not managed properly.

[00:48:06] Rohit Goel: The second quote I'd like to share is by Ayrton Senna, who is regarded as the greatest Formula One driver of all time, and he said, every driver has a limit. Mine is a little bit further than others. I find this quote very inspiring and what it means to me is that to excel in anything one does, one has to be willing to work harder than the others. Keep pushing their personal boundaries and not be afraid to take well thought out risks.

[00:48:37] Umar: Beautiful. It's a great way to end a podcast on treasury management. Rohit, if people want to reach out to you, they want to connect with you, what's the best way to do so? 

[00:48:48] Rohit Goel: The best place for that is to find me on LinkedIn. I believe you're going to share my LinkedIn profile, so yeah, that would be the best place.

[00:48:56] Umar: Perfect. I'll do that. Rohit, it's been a pleasure. Thanks a lot again for coming today, and we'll stay in touch. 

[00:49:03] Rohit Goel: Yeah. Thanks so much, Umar. It's been a pleasure for me as well. Great speaking with you and, yeah, looking forward to your future podcasts.