By Elizabeth Howcroft
LONDON (Reuters) - Cryptocurrency investors have become more cautious about who they do business with, after being burned last year by sudden collapses of Celsius Network, Voyager Digital, FTX and others, and fearing that a regulatory crackdown will put more pressure on the remaining companies.
The crypto platform's recent bankruptcies have trapped customer assets worth around $34 billion, according to Xclaim, which allows creditors to exchange such claims.
To protect themselves, institutional crypto investors are turning to exchanges that offer better asset protection, bolster trading partner due diligence and execute trades in smaller chunks, among other new risk management measures, executives say and industry data.
"Investors in this asset class have learned their lessons the hard way and are now much pickier about who to deal with," said Samed Bouaynaya, digital asset portfolio manager at London-based hedge fund Altana Wealth.
Binance.US and Coinbase (NASDAQ:COIN) Global are the latest crypto exchanges to come under scrutiny after the US Securities and Exchange Commission (SEC) sued the pair for allegedly breaking its rules , and industry executives expect more enforcement action. Binance and Coinbase deny the regulator's claims.
Altana is now prioritizing exchanges that allow it to settle and hold its assets with independent third-party custodians such as Copper in the UK and Fireblocks in the US. Because Binance does not give Altana this option, the hedge fund rarely leaves balances at Binance overnight, Bouaynaya said.
Binance did not respond to a request for comment but said in a statement last week that "client funds are still safe."
Coinbase said its platform assets are safe and the SEC litigation will not affect its operations.
Anatoly Crachilov, managing director of London-based Nickel Digital Asset Management, said nearly all of its transactions now take place on exchanges that allow off-exchange settlement, meaning assets are settled and held separately from the exchange, versus 5% before the FTX collapse.
Declining stablecoin and ether exchange balances suggest users are withdrawing their assets from exchanges, though it's difficult to gauge the proportion of assets that are being transferred to custodial solutions, Martin Lee said. , data journalist at blockchain tracker Nansen.
"We've seen quite a significant increase in the number of trading firms looking for a model that allows them to continue trading on exchanges, while still being able to protect their capital," said Stephen Richardson, CEO of Fireblocks.
Copper also said it is seeing an increase in off-exchange settlement demand.
“UNCOMFORTABLE” EXHIBITION AT BINANCE
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Investors piled into cryptocurrencies when interest rates were low, pushing the market to a peak value of $3 trillion in 2021. But they became cautious as rates rose, causing prices to plummet. prices and triggering fatal liquidity crises for several crypto firms. The value of the crypto market has fallen to around $1.1 trillion, according to data from CoinGecko.
European crypto asset manager CoinShares has stepped up its due diligence after losing 26 million pounds ($32.65 million) in the collapse of FTX. It now asks trading partners about their operations, cybersecurity setup, credit exposure and exposure to various cryptocurrencies, CEO Jean-Marie Mognetti said.
And whereas previously CoinShares categorized markets into red, orange or green tiers, the system is “very simple now,” Mognetti said. "It's like red or green. There's no more amber."
The crypto industry remains risky with highly volatile assets. Financial regulators like the SEC claim that many crypto companies flout applicable rules, which means risk management still lags behind the traditional financial industry.
While the SEC's crackdown on Binance.US has raised questions about its future, traders say dealing with Binance is inevitable. It is the largest stock exchange in the world with around 60% of the world's trading volumes, according to Kaiko data.
The American subsidiary of Binance said last Thursday that it was suspending dollar deposits. Two days earlier, the SEC had asked a court to freeze his assets. The SEC alleged that Binance and its CEO Changpeng Zhao were secretly controlling and misappropriating client assets.
"It's inevitably a risk we all carry in crypto - we have uncomfortable concentration risk on a big exchange called Binance," said Nickel Crachilov.
He warned that any more dramatic exchange failures would “possibly inflict a nuclear crypto winter.”
When dealing with the riskiest exchanges, US-based crypto investor Arca tries to minimize its exposure by breaking large exchanges into smaller chunks, said Wes Hansen, chief trading and operations officer at Arca. Arca, without naming specific companies.
Its requests for counterparty information are "much more intense and more frequent," while the company also monitors Twitter for information on which companies might be in trouble, Hansen said.
“Everyone is so scared in the market right now,” he added.