Institutional cryptocurrency investors are transferring to exchanges that provide tighter asset protection, increasing due diligence on trading counterparties, and performing trades in smaller chunks in order to safeguard themselves.
Investors in cryptocurrencies are becoming more selective about the companies they engage with as a result of last year’s abrupt failures of Celsius Network, Voyager Digital, FTX, and other companies. They also fear that a regulatory crackdown would increase pressure on the firms that are still in operation.
According to Xclaim, a marketplace that enables creditors to trade such claims, the recent crypto platform bankruptcies stranded client funds currently valued at almost $34 billion.
According to executives and market statistics, institutional cryptocurrency investors are changing to exchanges that provide stronger asset protection, increasing due diligence on trading counterparties, and completing trades in smaller chunks, among other new risk management methods, to safeguard themselves.
“Investors in this asset class have learned their lessons the hard way and are now being much pickier about who to deal with,” said Samed Bouaynaya, a portfolio manager of digital assets at the London-based hedge fund Altana Wealth.
Binance.After being sued by the U.S. Securities and Exchange Commission (SEC) for allegedly breaking its regulations, US and Coinbase Global are the most recent cryptocurrency exchanges to receive investigation. Industry insiders anticipate other enforcement proceedings. The regulator’s accusations are refuted by Binance and Coinbase.
Altana currently places a higher priority on exchanges that let it settle and store its assets with unbiased third-party custodians, such as the UK’s Copper and the US Fireblocks. Altana rarely leaves balances with Binance overnight because Binance does not provide it the choice, according to Bouaynaya.
Although Binance declined a request for comment, it did say last week that “customer funds are always safe.”
According to Coinbase, the assets on its system are secure, and the SEC lawsuit won’t have an impact on how the company conducts business.
Almost all of Nickel Digital Asset Management’s trading now occurs on exchanges that permit off-exchange settlement, which means the assets are resolved and stored separately from the exchange, as opposed to 5% before the demise of FTX, according to Anatoly Crachilov, chief executive of the London-based company.
Although it is difficult to determine what percentage of assets are going to custody solutions, declining exchange balances of stablecoins and ether show that consumers are removing their assets from exchanges, according to Martin Lee, a data journalist at blockchain tracker Nansen.
According to Stephen Richardson, general director of Fireblocks, “We have seen quite a significant increase in trading companies that are looking for a model to still be able to trade on exchanges while being able to safeguard their capital.”
Additionally, Copper reported that demand for off-exchange settlement has increased.
Uncomfortable exposure to Binance
When interest rates were low, investors flocked to cryptocurrencies, driving the market to a $3 trillion high in 2021. However, as rates increased, they became cautious, which caused prices to fall and led to deadly cash shortages for some crypto enterprises. According to data from CoinGecko, the value of the cryptocurrency market has decreased to about $1.1 trillion.
CoinShares, a European manager of cryptocurrency assets, increased counterparty due diligence after suffering a loss of £26.5 million ($32.65 million) owing to the demise of FTX. According to CEO Jean-Marie Mognetti, it now questions trading partners about their operations, cybersecurity setup, credit exposure, and exposure to different cryptocurrencies.
The system is “very simple now,” according to Mognetti after CoinShares previously categorized marketplaces as red, amber, or green. It’s similar to red or green. Amber is no longer present.
Due to its highly fluctuating assets, the crypto sector is still dangerous. Financial watchdogs like the SEC claim that many crypto businesses break the law, which shows that risk management still lags behind the regular financial industry.
While Binance was the target of SEC action.US has expressed concerns about its future, and traders claim to do business with Binance is inevitable. According to Kaiko data, it is the largest exchange in the world, accounting for around 60% of all trade volumes worldwide.
The US subsidiary of Binance announced on Thursday of last week that it was stopping dollar deposits. The SEC requested a court freeze its assets two days earlier. According to the SEC, Binance and its CEO Changpeng Zhao secretly managed and misappropriated the funds of their users.
We all bear this uncomfortably high concentration risk on one sizable cryptocurrency exchange named Binance, according to Nickel’s Crachilov.
He cautioned that any additional shocking exchange failures “might cause a nuclear crypto winter.”
Without mentioning any specific firms, Wes Hansen, head of trading and operations at US-based cryptocurrency investor Arca, said that when working with the riskiest exchanges, Arca seeks to reduce its exposure by splitting large trades into smaller ones.
According to Hansen, the company’s counterparty information requests have become “much more intense and frequent,” and it also keeps an eye on Twitter to see which companies may be having financial difficulties.
“Everyone’s just so scared in the market right now,” he continued.
