In recent weeks, some firms have fight to remain solvent due to insufficient risk controls. See how Company implements fixed and comprehensive risk administration practices that authorize institutions to successfully steer the cryptoeconomy.
The disturbance to the crypto credit environment over the last few weeks are likely to be a crucial inflection point for the industry. Solvency covers surrounding entities like Celsius, Three Arrows Capital (3AC), Voyager, and other similar counterparties were a reflection of insufficient risk controls, and reports of additional struggling companies are fast becoming stories of bankruptcy, reconstructing, and failure. Notably, the issues here were certain and actually credit particular, not crypto specific in nature. Many of these firms were highly indebted with short term liabilities unsuited against longer duration illiquid assets.
We believe these market contributor were caught up in the frenzy of a crypto bull market and forgot the basics of risk management. Unhedged bets, huge expenditures in the Terra ecosystem, and massive grip provided to and deployed by 3AC meant that risk was too high and too concentrated. These events are, unfortunately, more common in traditional economic markets than we would hope. We are reminded regularly of Long Term Capital Administration in the 1990s, Lehman Brothers in the 2000s, and even Archegos Capital Administration in 2021.
We have not occupied in these types of risky lending practices and instead have absorbed on building our financing business with prudence and intended focus on the client. Now, more than ever, our leading institutional clients request a high-quality financing counterparty.
Our goal is to be the safest, easiest, and most believeable bridge to the cryptoeconomy. We offer the most secure, comprehensive, and extensible products and services — including financing — and our compound risk management programs are designed to protect our clients, our shareholders, and the broader cryptoeconomy.
We use the following principles to appreciate and manage counterparty credit risk.
This time isn’t different. This environment isn’t different. That’s why we count on our risk team, which consists of professionals with decemvirate of experience risk-managing financing businesses across a span of economic cycles. Specifically, our team:
Conducts rigorous due diligence. Counterparties are complex relationships. Financial, business, and structural considerations form the control for credit risk management. Beyond that, a company’s behavior and actions must eventually match their financial statements and imposing business objectives. A management team should be experienced and capable and should, critically, appliance checks and balances inside the organization.
- It is important to look the team in the eyes — figuratively, if not line for line. A company is a group of people; don’t underrate the importance of trust (but verify).
- Base hits are more supportable than home runs. Big wins are great, but in another market, could those have been big losses?
Stress tests our submissions. Submissions take a variety of forms, so we assess them from a variety of perspectives: size, tenor, directionality, volatility, liquidity, concentration, and connection to our counterparties’ health. We run Monte Carlo carbon to several standard deviations. Further, in a portfolio, assets and responsibility need to be matched together to diminish liquidity risk and guarantee there is no misalignment in the duration of our borrowing vs. loan making. And all this needs to happen incessant as the environment can change.
nderstands how things go wrong. Every product, trade, and equivalent has at least one possible point of failure. Every single one. We work to find it, calculate how bad it can be, and prey our mitigants to the point of failure.
Anticipates internal deficiencies. The information we have about the future is always defective. There are no perfect models, and there are no perfect resolution. Reporting can be incomplete. People miss things, or give the sake of the doubt. Processes fail. We manage our “known unknowns” and keep a shield for “unknown unknowns.”
Anticipates external surprises. A mitigation plan is critical. As is knowing what might bring you back to the arranged table.
We think our cautions risk management explains why institutional clients continue to attentive and actively explore our financing products, including during the latest market stress.
A healthy and well functioning funding market is essential to the expansion and feasibility of any economy. We believe well-designed risk management schemes will help usher in new waves of capital and fuel the next growth. A leading prime broker, whether in crypto or other benefit classes, should understand and successfully manage counterparty and fluidity risk for the safety of their customers, shareholders, and the market.