- Nickel Digital is advocating for increased integration of off-exchange settlements in crypto, noting that OES solutions can dramatically reduce fraud and bankruptcy risks
- Analysis shows 63% of crypto daily trading volume is currently on 7 of the largest crypto exchanges that integrate OES solutions.
- The FTX implosion catalysed further integration of the solution as platforms sought to reduce counterparty risk.
Nickel Digital Asset Management, a London-based investment manager authorised by the Financial Conduct Authority (FCA) and registered with US Commodity Futures Trading Commission (CFTC), says cryptocurrency exchanges can do more in the effort to reduce fraud and counterparty risks.
According to the UK-based hedge fund manager, crypto can achieve the above goal if more crypto exchanges joined a core group of platforms currently integrated with Off Exchange Settlement (OES) solutions.
OES, which allows for off-exchange settlements that tap into the benefits of crypto native tools such as on-chain visibility, has the capacity to not only significantly cut counterparty risk, but also help market players better protect investors from events such as the shocking collapse of crypto exchange FTX.
Anatoly Crachilov, CEO of Nickel Digital, noted in a statement:
“We believe OES is the best path forward to mitigate counterparty risks in the crypto ecosystem, eliminating the need for investors to keep their capital at trading venues.”
63% of crypto daily volume on 7 top exchanges using OES
Nickel, Europe’s leading digital asset investment manager and which was founded by Goldman Sachs, JPMorgan and Bankers Trust alumni, says already 7 of the top 20 largest crypto exchanges had integrated with OES by 15 March 2023.
Another platform is in the process of integrating the solution, which will push the total daily trading volume on OES-supported platforms from 63% to nearly 70%.
Recent analysis conducted by Nickel also revealed that 11% of daily trading volume is on a few well-established platforms, including Coinbase, Kraken and Bitstamp. These exchanges are regulated in Europe and the US.
Interestingly, only 5% of daily trading volume was on exchanges that integrate OES before the FTX collapse. Nickel’s latest study shows that the FTX debacle catalysed the adoption of off-exchange settlements at four exchanges.
How does the OES flow work?
According to Nickel Digital, an optimal OES flow is one that integrates four entities – an exchange, a custodian, trusted third party (to offer a dispute resolution mechanism) and a trader (client of the crypto exchange and the custodian).
With OES integration, clients deposit funds with a heavily regulated custodian. An exchange then only “mirrors” those funds for the purpose of trading, which means all client money stays off-exchange and safe in case the exchange implodes.
For example, UK-based crypto platform CoinFLEX had integrated Clearloop (an OES version offered by Copper). When the exchange went into receivership amid the fallout from FTX, Copper’s clients did not suffer any losses related to Coinflex’s problems.
Apart from FTX, some of the top exchange implosions and bankruptcies include Mt.Gox, Liquid, QuadrigaCX, Cryptopia.
Nickel believes crypto can attract more from institutional investors if the sector offers robust protection mechanisms for investors’ assets. As part of this objective, the digital asset manager has released a paper discussing the key, widely-accepted custodial arrangements and market standards for OES solutions.