Cryptocurrency investors have become more cautious about who they do business with, after getting burned last year by sudden collapses of the Celsius Network, Voyager Digital, FTX and others, and fearing a regulatory crackdown will put more pressure on the remaining companies. .
Recent bankruptcies of the crypto platform trapped client assets now worth around $34 billion (nearly Rs. 2,78,600 crore), according to Xclaim, which allows creditors to settle such claims.
To protect themselves, institutional crypto investors are switching to exchanges that offer greater asset protection, driving due diligence with trading partners and executing transactions in smaller chunks, among other new risk management measures, according to executives and industry data. .
“Investors in this asset class have learned their lessons the hard way and are now being much more picky about who they deal with,” said Samed Bouaynaya, a digital asset portfolio manager at London-based hedge fund Altana Wealth. .
Binance.US and Coinbase Global are the latest cryptocurrency exchanges to come under scrutiny after the US Securities and Exchange Commission (SEC) sued the pair for allegedly violating its rules, and industry executives expect more enforcement actions. Binance and Coinbase deny the regulator’s allegations.
Altana now prioritizes exchanges that allow it to liquidate and hold its assets with independent third-party custodians like UK-based Copper and US-based Fireblocks. Because Binance doesn’t give Altana that option, the hedge fund rarely time leaves balances on Binance overnight, Bouaynaya said.
Binance did not respond to a request for comment, but said in a statement last week that “client funds are always safe.”
Anatoly Crachilov, chief executive of London-based Nickel Digital Asset Management, said almost all of its trading now takes place on exchanges that allow off-exchange settlement, meaning assets are liquidated and kept separate from the stock, compared to 5 percent before the stock. FTX collapse.
Declining stablecoin and ether exchange balances suggest users are withdrawing their assets from exchanges, though it’s hard to gauge what proportion of assets are moving to custody solutions, said Martin Lee, data journalist at crypto tracker blockchain Nansen.
Spokesmen for Fireblocks and Copper said they were seeing an increase in demand for their services.
Greg Tusar, Coinbase’s head of institutional products, said Coinbase had taken a number of steps to ensure its clients’ assets are safe, including providing user agreements across all of its products that guarantee clients’ continued rights as owners of those assets in the unlikely event of a bankruptcy
“There’s definitely a feeling that people in general are focused on counterparty credit and counterparty risk. We feel like, broadly speaking, we’re the beneficiaries of that.”
‘Uncomfortable’ exposure to Binance
Investors piled into cryptocurrencies when interest rates were low, driving the market to a peak value of $3 trillion (nearly Rs. 2,45,78,100 crore) in 2021. But they turned cautious when rates they increased, causing prices to fall and causing fatal liquidity. crunches for various crypto companies. The value of the crypto market has fallen to around $1.1 trillion (almost Rs. 90,12,000 crore), according to data from CoinGecko.
European crypto asset manager CoinShares stepped up its counterparty due diligence on the FTX crash. It now questions trading partners about their operations, cybersecurity settings, credit exposure and exposure to various cryptocurrencies, chief executive Jean-Marie Mognetti said.
And while CoinShares previously categorized markets into tiers such as red, amber or green, the system is “very simple now,” Mognetti said. “It’s like red or green. There’s no amber anymore.”
The crypto industry remains risky with highly volatile assets. Financial regulators like the SEC say that many cryptocurrency companies flout applicable rules, meaning risk management still lags behind the traditional financial sector.
While the SEC crackdown on Binance.US has raised questions about its future, traders say dealing with Binance is inevitable. It is the world’s largest exchange with around 60 percent of trading volumes globally, according to Kaiko data.
Binance’s US affiliate said Thursday last week that it would suspend dollar deposits. Two days earlier, the SEC asked a court to freeze his assets. The SEC alleged that Binance and its CEO, Changpeng Zhao, secretly controlled and diverted client assets.
“This is an unavoidable risk that we all carry in crypto: We have uncomfortable concentration risk on a big exchange called Binance,” Nickel’s Crachilov said.
He warned that any more dramatic exchange failure would “perhaps inflict a nuclear crypto winter.”
When it comes to the riskiest trades, U.S.-based cryptocurrency investor Arca tries to minimize its exposure by breaking up large transactions into smaller chunks, said Wes Hansen, Arca’s director of trading and operations, without naming him. specific companies.
Requests for information from its counterparties are “much more intense and more frequent,” while the company also monitors Twitter for intelligence on which companies might be in trouble, Hansen said.
“Everyone is so scared in the market right now,” he added.
© Thomson Reuters 2023