Opinion by: Dominic Lohberger, chief product officer at Sygnum.
Counterparty risk in crypto has always cycled: exchanges fail, standards tighten, then complacency returns. This time, however, change looks structural. Traditional finance firms entering crypto are bringing established market practices, and the infrastructure to support them is finally available. Institutions can now keep assets with regulated custodians while trading on venues via mirrored balances, avoiding on-exchange deposits. That is a lasting shift in how institutional capital moves in digital assets.
A clearer separation of powers is emerging. Recent deals underscore this: Ripple’s acquisition of Hidden Road and moves by banks such as Standard Chartered into crypto prime services signal value concentrating in institutional trading infrastructure. Historically, exchanges combined trading, custody and clearing—an arrangement born of necessity in crypto’s early years but unsuited to scaled institutional participation. Events like the FTX collapse and large hacks exposed the danger of conflated roles and made separating custody from execution a baseline expectation.
Two main models now remove exchange counterparty risk, each with different trade-offs. Off-exchange custody (tri-party arrangements) lets traders hold assets with an independent custodian while receiving a mirrored balance on an exchange. If assets are segregated and off-balance-sheet, exchange counterparty exposure is effectively eliminated. These setups are cost-efficient because custodians aren’t required to deploy their own balance sheets.
Prime brokerage provides a richer operational layer: unified onboarding across venues, cross-venue netting, settlement and leverage. These services suit market makers and funds that operate across many venues. But they shift counterparty risk from the exchange to the prime broker. In traditional finance, that is mitigated by very large bank balance sheets. In crypto, prime brokers are growing and well connected but generally smaller than systemically important banks. Some institutions accept that trade-off for the operational benefits.
Collateral economics are changing the calculus. When custodians are banks, institutions can pledge traditional instruments—especially short-dated US Treasurys—as collateral while keeping the assets at the custodian. T-bills can be mirrored on an exchange at high loan-to-value without leaving custody, and custody fees are small relative to the yield on those securities. In effect, counterparty protection can generate positive net return rather than being a pure cost. That flips the question from “should we de-risk?” to “why leave yield on the table?” Even for strategies that require pledging the underlying crypto, using an independent custodian reduces the risk surface.
The eligible-collateral set is expanding. Stablecoins are already accepted in many off-exchange arrangements. Tokenized money market funds and other continuously accruing yield instruments are next. The trajectory is toward multi-asset collateral frameworks that let institutions shift margin across venues and maintain security, often in near real-time and around the clock.
Expect more global systemically important banks to offer off-exchange custody and broaden accepted collateral. Custodians will add operational tooling; prime brokers will strengthen custody and risk frameworks. Over time, the distinction between models may matter less than the outcome: institutional-grade risk management.
After years of wondering if institutions would come, the answer is clear—they have. Rather than institutions adapting to crypto, crypto infrastructure is adapting to institutional needs. Firms that recognise and build for this shift—prioritising clear separation of custody and execution, robust collateral frameworks and the operational capabilities of prime brokerage—will shape the next era of digital-asset markets. Those that don’t will be left managing yesterday’s risks with yesterday’s tools.
