In recent years, the digital asset market has experienced both explosive growth and sobering setbacks. The collapse of FTX in November 2022 highlighted a significant vulnerability within the crypto ecosystem – the inherent counterparty risk that emerges when exchanges serve as both trading venues and custodians, roles traditionally held separately to protect market participants.
When an exchange collapses, as FTX did, it jeopardizes not just its own operations, but the assets held by its users. As a result, traders reduced their trading volumes to minimize their exposure, while many institutions as well as new entrants were prevented from participating in exchange trading entirely. This risk-averse behavior has a direct impact on all exchanges. Trading volumes declined, which wouldn’t have happened if capital could be safely deployed.
Building Fireblocks Off Exchange to address market vulnerabilities
Recognising the limitations of existing off exchange solutions, which usually transfer risk from the exchange to a third party custodian, Fireblocks chose to develop the Off Exchange product. Fireblocks took a technology-first approach in developing this platform.
Most off exchange models in the market rely on custodial accounts with pooled assets that are mirrored to an exchange account for trading. This reduces the direct exposure to the exchange, but it introduces a new risk – the custodian, which surfaces potential vulnerabilities, as some operate without a prudential license or lack adequate financial stability. Fireblocks is empowering properly regulated custodians and prime brokers as a part of its offering.
Fireblocks Off Exchange enables trading firms to maintain control over their assets while traders execute instant spot, margin, and derivatives trades. Firms programmatically lock assets in wallets they control, mirroring collateral to the exchange without ever giving up custody of their own digital assets. The assets remain securely segregated in shared multi-party computation (MPC) wallets, and on-chain settlement is utilized to ensure that funds are safe from hacks, bankruptcy or fraud.
The benefits of Fireblocks Off Exchange for exchanges
For exchanges, Fireblocks Off Exchange actually mitigates counterparty risk, rather than transferring it to a third party. By eliminating the need for traders to pledge assets to custodians, traders can maintain liquidity and focus on high volume trading. This means that exchanges benefit from more trading volume and more revenue. With Fireblocks Off Exchange, both exchanges and traders have direct visibility into the balances held in the collateral vaults, so they can both support either side of a trade with trust and confidence. As evidence of the product’s potential, over $100mn in assets were allocated to collateral accounts in September 2024 through Off Exchange early users.
By integrating into the Fireblocks Network, exchanges also get immediate access to the vast network of institutional traders, including over 50 regulated banks with hundreds of clients. This seamless integration means that they access a client base that exchanges didn’t previously have access to. Also, exchanges don’t have to make any major changes to their existing workflows. At a high level, over $50 BN in assets were transferred through the exchanges connected to the Fireblocks Network within the last 90 days alone. Many of these transactions will transition to Off Exchange as adoption grows.
Finally, exchanges can reduce costs and overhead because they no longer need to manage bespoke integrations to individual custodians. Through one standard integration, exchanges will open themselves up to the entire Fireblocks Network. Off Exchange does not require exchanges to deposit funds with Fireblocks, so there is reduced exposure.
The need for secure, efficient, and scalable solutions in the digital asset trading market has never been more urgent. With increasing scrutiny from regulators and growing awareness of counterparty risks, the market is ripe for solutions that offer both security and flexibility. Firbelocks Off Exchange provides a unique opportunity for exchanges and trading firms to mitigate risk while maximizing their trading potential.
Interested in learning more about Fireblocks? Request a demo.
