January 13, 2022
Insights

The Briefing: How Ramp’s early adoption of stablecoins increased our Corporate Treasury returns

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Editor’s note: The Briefing is our series highlighting strategic projects and insights from experienced finance pros. Follow us on LinkedIn or Twitter to get alerts for new briefings.

Over the past two and a half years, Ramp has been fortunate enough to raise over $620M in a mix of equity and debt financing. This is a significant amount of capital by any metric, but especially so relative to our low operating burn. As a result, we have a meaningful amount of excess cash on our balance sheet that we likely won’t deploy operationally for at least one, two, or even more years into the future. 


As Head of Finance, capital allocation is one of my major responsibilities. As a result, I needed to figure out a way to allocate and invest all of this excess capital. Like every Corporate Treasurer or CFO, I’m tasked with efficiently managing investments by maximizing returns while also ensuring it's available when the company needs it. At the same time, I also have a fiduciary responsibility to my stakeholders and Ramp’s investors, and I have to make sure our capital is invested in a prudent manner.


The traditional options available to a Corporate Treasurer 

Corporate Treasurers focus on two main things in determining asset allocation:

  1. Preservation of Capital.  We need to invest in safe things, hence the focus on Government Treasuries and investment grade corporate bonds, which are generally defined as AAA to BBB rated securities. 
  2. Liquidity. We need to manage around operating expenses, runway, and any other liquidity needs, and hence, the asset allocation decision is typically made with an eye toward the various outputs of our operating model (the topic of a future blog post). E.g. How much cash will we need in 6 months? 12? What about 24 months out? Where this exercise shakes out for most CFOs is a strong focus on matching asset and liability duration, as well as deep markets for liquidity purposes.


As all market participants know, the current yield environment is challenged. We are 10+ years into a zero-interest rate environment and easy Fed monetary policy. One consequence of that is traditional bonds and fixed income securities are not producing compelling investment returns. For context, investment grade (IG) bonds currently yield on average 3-3.5%, but the average bond in the IG universe is also a 12 year bond! So that means we need to take 12 year duration risk just to get to a 3-3.5% yield. Most corporate treasuries aren’t interested in taking duration risk that long. Firstly, because you may need to tap into that cash well before the bonds mature. Secondly, the mark-to-market risk on that bond is quite high from an interest rate sensitivity perspective, so you’ll be saddled with all sorts of unrealized gains and losses, which will create noise in your financial reporting.


Therefore, for most start ups, SMBs, and even mid-market companies, Corporate Treasurers largely focus on the < 1-2 year horizon for their fixed income investments. However, if we want to stick to shorter maturities for liquidity and working capital considerations, yields are even more challenged than what I described above. As an example, Ramp’s main fixed income and ETF investments mainly consist of less than 1-2 year IG paper, and they yield roughly 25-75bps. 


In the below table you can see an illustrative snapshot of our core investment portfolio from a few weeks ago.

Portfolio average
Rating
A/A2
Maturity
1.02 years
Average life
0.96 years
Effective duration
0.95 years
Coupon
2.28%
Market price
101.80
Yield to worst
0.41%


You don’t have to be a former 10+ year bond trader on Wall Street to know that while the portfolio above looks safe, the yields are not very compelling. That’s one of the reasons why, as Ramp was closing its $300M Series C fundraising this past summer, I started to look around for other options to enhance our yield, without exposing us to outsized risk. In the below table, I outline a small sample of the investment opportunities the Ramp finance team evaluated.


* Good time to note that nothing in this article should be construed as investment advice. Please do your own work! 

Option
Examples
Pros
Cons
ETFs and Mutual Funds
  • VCSH
  • ICSH
  • MINT
ETFs with very short dated investment grade underlying holdings
  • Very deep, very liquid markets
  • Transparency, you know what your holdings are
  • Managed by the largest financial institutions on the planet
  • Natural reinvestment
  • Low management fees
  • Yield is challenged
  • You can’t own more than 10-25M of these tickers without moving markets
  • Yielding between 20-70bps
  • You need a treasury policy that allows you to hold equity securities (since these are technically stocks)
  • Mark to market risk
Short dated IG bonds
  • Citi 2.9% 12/8/2021
  • GM 3.25% 1/5/2023
  • HP 2.25% 4/1/2023
Corporate and Treasury notes with short dated maturities and very high ratings
  • Very deep, very liquid markets
  • You can create a custom portfolio with exactly the yield / duration profile that you want for your company
  • Hold to maturity assets means you can lock in your yield and not worry about mark to market gains/losses
  • You need to outsource this to an outside manager, since managing a bond portfolio is not the best use of your time (unless you are as big as Google who has a whole Treasury team)
  • Yields are between 20-70bps
  • Must be constantly reinvested as bond holdings mature
Cryptocurrency
  • Bitcoin
  • Ethereum
  • Uncorrelated asset pricing to the broader markets
  • Potentially significant upside and returns
  • Provides secure and safe ownership and transfer of assets
  • Relative liquid markets
  • Too volatile to be appropriate for most corporate treasuries
  • Regulatory scrutiny
  • High transaction costs
  • Very high cost of maintenance
  • Requires active asset management
Stablecoins
  • Best of both worlds
  • Reasonably low currency risk
  • Liquid and low underlying duration risk
  • High risk adjusted returns
  • Early adoption risk
  • Others to be discussed below


The new option for Corporate Treasurers: stablecoins 

Once the team started diligencing stablecoins in earnest, we learned about some very cool and compelling characteristics of this market. There is already a lot of outstanding literature on USDC and stablecoins out there, so we won’t belabor the point. In summary, USDC is one of the world's leading digital dollar stablecoins, with $36B in circulation as of mid-November 2021. It is fully backed by cash and equivalents and short-duration US Treasuries, so that it is always redeemable 1:1 for US dollars (USD). For the Ramp team, stablecoins seem to offer a happy middle ground, where we’re able to take advantage of the upside embedded in the massive growth of the crypto ecosystem, as well as the transparency, rigor, and safety of a well-run, (and most importantly) conservatively-managed financial product. 


The key insight is that there is actually a large and vibrant ecosystem where there are natural borrowers of USDC (for technical reasons related to the contango of the BTC futures curve which I won’t delve into here). USDC borrowing and lending actually facilitate a significant amount of trade settlement, clearing, and money movement in the crypto-enabled financial ecosystem. As a holder of USDC, one can generate a reasonably high yield as a market participant. This serves as a mechanism in the crypto markets not unlike that of overnight repo or term repo in the traditional banking markets.


What about actual implementation? As a Corporate Treasury who is holding a reasonable amount of excess USD, there are a number of blockchain-enabled companies that can help to convert that USD into USDC and facilitate the transaction I described above. Some of these players include: Circle, Genesis, Anchorage, and Compound, to name a few. We have spent the last few months working specifically with the Circle team, and as of several months ago, have deployed a significant amount of our Corporate Treasury into the Circle Yield product

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The solution

In an ideal state, the user experience for Circle Yield should feel like a Certificate of Deposit (a CD that you can get at any bank): you lock up your USD for a specific term, with the expectation of a certain annualized yield. After the term matures, you have the option to take your money back, or you can roll it again. There are also a number of providers in that list above who enable “open term” products, which enable day to day liquidity without locking in a specific term. Interest accrues daily and is paid out monthly in USDC. At any point in time, if you have unencumbered USDC, you can convert it back into USD and put it back into a bank account.


In the table below, you can see an illustrative Circle Yield term structure from late October 2021. As you can see, for the short dated nature of the instrument, the return profile is significantly higher than what you can achieve with traditional fixed income securities. 

1-month
3-month
6-month
12-month
6.95%
7.20%
7.45%
7.70%


* Good time to note again that nothing in this article should be construed as investment advice. The rates quoted above may no longer be valid. Market conditions and expected returns are subject to change. 


That being said, this wasn’t a no-brainer. We spent over 4 months diligencing the various risks and mitigants associated with this type of transaction. Here is a very abbreviated list of topics we focused on:

  • Custody
  • AML/KYC of the underlying borrowers
  • Loan management and reporting requirements
  • Collateralization management and overcollateralization provisions 
  • Crypto macro dynamics and market microstructure
  • Liquidation and margin call provisions
  • Audit-ability and attestation reports
  • Counterparty capitalization and corporate governance
  • Tax and financial reporting implications
  • CeFi vs DeFi


A comprehensive summary of all of our analyses and conclusions would span many pages, so I will spare you. Suffice it to say, for all of the finance nerds out there (like me), when all is said and done, the trade construction ought to result in a financial instrument that feels similar to a short dated Covered Bond. Covered Bonds are fixed income instruments (historically popular in Europe) where your fixed income securities have dual-recourse to both the underlying asset (typically mortgage pools) and the credit counterparty (the company issuing the product). You can see where the parallels are in this example.  


Hedging out most of the major risks and structuring various protections for our assets was no easy task, but we were so glad to be able to work with a team as professional and diligent as our partners at Circle. The work continues even to this day.


Takeaways and learnings

I’m glad that the executive leadership are enterprising and entrepreneurial enough to let us participate in this exciting new Treasury experiment. We had the ability to be creative, thoughtful, and deliberate with our portfolio construction (we’ll publish another blog post in the future about crafting the Treasury Policy). We’re super fortunate to have the flexibility to research and delve into the stablecoin market with the best of the best.

While the majority of our Corporate Treasury remains invested in conservative investments (like the ones we summarized in the first half of this Briefing), we are glad to be one of the first non-crypto companies in America to deploy a meaningful allocation of our Corporate Treasury into USDC. 

Given how persistent some of the existing market dynamics are in the crypto space, I wouldn’t be surprised if yields stay relatively high, and if we increase our USDC allocation over time. The whole Ramp team is eager to see how this market evolves and grows over the coming years.  

The information contained in this article is not and should not be construed as investment advice. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any investment discussed herein based on such investors' own review of publicly available information and should not rely on the information contained herein.

The information contained on this website has been prepared based on publicly available information and proprietary research.  The author does not guarantee the accuracy or completeness of the information provided in this document.  All statements and expressions herein are the sole opinion of the author and are subject to change without notice.

 

Neither the author nor any of its affiliates accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security or other investment.

Terms apply. Please see Circle Yield disclosures here.

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Alex Song
Head of Finance, Ramp

Alex brings over 10 years of experience as a hedge fund investor in structured credit, special situations, specialty finance, and fintech. He was born and raised in Changchun, China, and St. Louis, Missouri.

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