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Abstract

Investment risk refers to the potential for negative performance of invested assets, whether onchain or traditional. Given the volatile nature of alternative assets, including cryptocurrencies and other onchain assets, price fluctuations (Assets Under Management [AUM] changes) are anticipated and must be planned for accordingly. This document categorizes investment risk into two main areas: traditional asset investment risk and onchain asset investment risk. Effective management of these risks is essential for maintaining financial stability, ensuring regulatory compliance, and upholding the trust of our stakeholders and donors.

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Policy Statement

Endaoment recognizes the inherent volatility and risk associated with various asset classes. We are committed to actively managing and mitigating these investment risks through a comprehensive strategy that includes conducting market research, employing diversified investment approaches, and utilizing risk assessment tools to monitor and adjust portfolio exposure as necessary. Our goal is to balance the pursuit of growth with the need for risk control, ensuring that investment decisions align with the financial objectives and risk tolerance of our Board of Directors as outlined in our Investment Policy. Regular financial reviews and adjustments will be made in response to evolving market conditions and investment performance. Compliance with this policy is mandatory for all employees, contractors, board members, and representatives acting on behalf of Endaoment.

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Risk Management Strategy

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Risk Assessment

  1. Investment Risk Inventory and Classification
    • Maintain a comprehensive inventory of all invested assets, categorizing them based on their sensitivity, volatility, and potential impact on the organization.
  2. Market and Threat Analysis
    • Conduct regular market research and threat analyses to identify and evaluate potential risks associated with different asset classes, including both traditional and onchain assets.

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Risk Mitigation

  1. Diversified Investment Portfolio
    • Employ a diversified investment approach to spread risk across various asset classes and investment vehicles, minimizing the impact of poor performance in any single area.
  2. Blockchain as Single Source of Truth
    • Utilize blockchain technology as the definitive source of truth for all financial activities and balances, ensuring transparency and immutability of investment records.
  3. Regular Data Reconciliation
    • Conduct regular reconciliation of onchain and offchain financial data to identify and address discrepancies promptly, ensuring alignment and accuracy in financial reporting.
  4. Access Control Measures
    • Implement strict access controls to financial systems, ensuring that only authorized personnel can perform sensitive financial operations.

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Monitoring and Reporting

  1. Continuous Investment Monitoring
    • Employ continuous monitoring systems to oversee investment performance and detect irregularities or signs of excessive volatility in asset values.
  2. Incident Reporting Mechanism
    • Provide a secure and anonymous system for reporting suspected investment discrepancies, unauthorized transactions, or other related issues.

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Operational Controls

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Policies and Procedures

  • Documentation
    • All investment risk management policies and procedures are thoroughly documented, with both internal and external-facing components where relevant.
  • Annual Review
    • Conduct an annual review of policies, updating them as necessary to reflect current best practices and regulatory changes.

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Specific Investment Risk Controls

  1. Volatility Monitoring and Emergency Procedure
    • If the Board or both the CEO and COO agree that an invested asset is overly volatile, the following actions will be taken:
      1. Lock the specific portfolio in question through the cap system (set to 0).
      2. Inform donors of the closed portfolio.
      3. Force exit all positions from the portfolio into affiliated funds.
  2. Smart Contract Diligence
    • All onchain investment portfolios must have their underlying assets and/or protocols reviewed via independent third-party technical smart contract audits. All audits must be reviewed and approved before engagement.
  3. Yearly Third-Party Financial Audit
    • Conduct comprehensive financial audits annually by a third-party entity (e.g., Singer Lewak) and the Chief Operating Officer (COO). Updated audit documents must be publicly available on the Endaoment Docs page.
  4. KYC Processing
    • Implement documented policies and procedures for customer identification (including name, date of birth, address, and identification number), customer due diligence, and enhanced due diligence when necessary.
  5. Multisignature Wallet Use
    • Regularly confirm the integrity and operational security of all multisignature wallets used by staff on a monthly basis.
  6. Transaction Monitoring
    • Regularly audit incoming transactions to identify any suspicious patterns or activities that may indicate fraudulent behavior.
  7. Transaction Review Process
    • Establish documented policies and procedures for reviewing and approving transactions, ensuring both internal and external compliance requirements are met.
  8. Access Removal Procedures
    • Implement documented policies and procedures for promptly removing access rights of employees or contractors who no longer require access to financial systems.

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Vendor Management

  • Compliance Standards
    • Implement stringent controls and regular reviews of vendor relationships to ensure compliance with Endaoment’s finance and accounting standards.

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Segregation of Roles

  • Segregation of Duties
    • Ensure that critical financial procedures and systems have segregated duties to prevent any single individual from having full control over any process without oversight.
  • Approval Processes
    • Maintain segregated claim diligence and approval processes to uphold checks and balances.