Opinion by: Dominic Lohberger, chief product officer at Sygnum.
Counterparty risk in crypto markets has always moved in cycles. Exchanges default or get hacked. Standards tighten for a while. Then, complacency quietly returns as losses are forgotten.
What is happening this time is different.
Leading traditional finance players entering crypto must adopt practices from established financial markets. For the first time, the infrastructure exists to enable them to do so. They can mirror assets held with regulated custodians onto trading venues without ever depositing on-exchange.
This is a lasting change in how serious money actually moves through digital assets.
The separation of powers
Consider the mergers and acquisitions deal flow. Ripple deployed $1.25 billion to acquire Hidden Road. Hidden Road is a global multi-asset prime broker. This was the largest acquisition in crypto history. It signalled that institutional trading infrastructure is where value will concentrate.
Standard Chartered is building a crypto prime brokerage under its venture arm. These are infrastructure bets by firms that see where the market is heading.
For most of crypto’s history, exchanges have played every role at once. From trading venues, custodians and clearing houses, exchanges played them all. That conflation of roles was a necessity in Bitcoin’s earliest days. It was never going to survive institutional adoption at scale. The FTX collapse made that risk glaring, and the $1.4 billion Bybit hack reinforced it. The broader patterns of 2025 showed where counterparty exposure became a first-order operational risk. That’s where the separation of custody from execution became a baseline institutional requirement.
In traditional finance, this separation of powers is a bedrock principle. Crypto is finally catching up. A growing number of regulated off-exchange custody solutions now make this possible in practice. They allow institutions to hold assets with a custodian while trading on exchanges, with balances mirrored and settlement automated. Capital efficiency and security no longer have to be traded off against each other. Most market makers, hedge funds and OTC desks use some form of off-exchange custody. What was once considered a cost has become a basic pillar of risk management.
Two models, with different trade-offs
The market now offers two distinct approaches to removing exchange counterparty risk, and they solve different problems.
Off-exchange custody, sometimes called tri-party arrangements, allows traders to hold assets with a third-party custodian while receiving a mirrored balance on the exchange. If the custodian holds those assets segregated and off-balance-sheet, counterparty risk is eliminated. These setups tend to be cost-efficient because the custodian does not need to deploy its own balance sheet.
Prime brokerage is operationally richer. A prime broker acts as an intermediary and offers unified onboarding across exchanges, cross-venue net settlement and leverage. These are critical for market makers running strategies across dozens of venues. That active role means counterparty risk shifts from the exchange to the prime broker. In traditional finance, that risk is backstopped by investment banks with massive balance sheets. In crypto, the largest prime brokers are growing but still carry comparatively modest balance sheets. They’re capable and well-connected, but not yet at the scale of globally systematically relevant investment banks. Some institutional clients are comfortable with that trade-off.
The collateral economics that changed the conversation
The part of this shift that deserves equal attention is how collateral now works. When a custodian is a bank, it can accept traditional financial instruments as collateral, and that changes the economics. An institutional client holding short-dated US Treasurys can pledge them as collateral, mirrored onto an exchange at full loan-to-value. The T-bills never leave the custodian. The custody fees are a mere fraction of the yield this provides. The client earns a net positive return on collateral that protects them from exchange default.
Related: BitGo launches portfolio-based crypto lending platform for institutions
The vast majority of collateral deployed in bank-grade off-exchange custody structures today is in T-bills. When counterparty protection generates yield instead of costing money, the adoption question flips from “should we de-risk?” to “why are we leaving yield on the table?” The exception is strategies like the basis trade, where the client must pledge the underlying asset itself. Even there, holding crypto with an independent custodian reduces the risk surface.
What comes next
The eligible collateral story is expanding fast. Stablecoins are already accepted across multiple off-exchange setups. Tokenized money market funds that accrue yield continuously in real-time are next. The direction is toward multi-asset collateral frameworks that allow institutions to shift margin between venues and ensure security. In crypto, that reallocation can happen in near real-time around the clock.
In the months ahead, more global systemically important banks will enter off-exchange custody. This will rapidly widen the range of accepted collateral. As both models mature, custodians may add more operational tooling. Prime brokers will strengthen their custody frameworks. This will continue until the distinction matters less than the outcome. That outcome is institutional-grade risk management.
The crypto industry spent the better part of a decade debating whether institutions would arrive. They have, and they are not adapting to crypto’s infrastructure. Crypto’s infrastructure is adapting to them. The firms that recognise this shift and build accordingly will define the next era of digital asset markets. The ones that don’t will be left managing yesterday’s risk with yesterday’s tools.
Opinion by: Dominic Lohberger, chief product officer at Sygnum.
