Minimizing Counter-party Risk in Digital Asset Markets
As the crypto markets continue to expand and evolve, it is important for traders and investors to understand counter-party risk. Counter-party risk can arise from a number of sources, including exchanges, brokers, and other third-party entities. In order to protect yourself from unnecessary exposure to such risks, there are certain measures that you can take to minimise your vulnerability.
Minimise Holding Duration on Exchange Wallets
One way to reduce your exposure to counter-party risk is to minimise the amount of time you hold digital assets in exchange wallets. Exchanges are vulnerable targets for hackers, and are prone to default, so it is best practice to move your assets out of exchange wallets as soon as possible after executing trades. This will help ensure that any digital assets held in these wallets remain safe and secure.
Establish Credit Lines with Reputable Actors
It is essential to establish credit lines with reputable actors in order to minimise the risk of them never delivering your profits or losses (P&L). Establishing positive relationships with reliable parties who are willing to provide credit can help offset potential defaults should the worst happen. Some providers, like Aplo, even offer “trade from custody”, where they settle your trades directly in your custodial account without your funds ever leaving it.
Here are just a few examples of reputable actors that we at Aplo would recommend, based on where your company is registered:
- Europe: Aplo, Wintermute
- US: Galaxy Digital, Anchorage Digital
- Asia: OSL, DBS
Use Platforms Licensed in Tier 1 Jurisdictions
When selecting a platform for brokerage and custody services, it is important that they are licensed in Tier 1 jurisdictions like the US, the EU or Singapore. This will ensure asset segregation and minimise conflicts of interest between customers and service providers. Additionally, this helps protect customers’ funds by ensuring compliance with applicable regulations and laws. Finally, you don’t have to go through the entire company’s financials, but can instead rely on the regulator’s audit and stamp of approval. To this day, Aplo is the only crypto prime broker licensed for both digital asset custody and brokerage in the EU, through the French regulator AMF.
Limit Self-Custody operations
If you choose self-custody as an option for managing your digital assets, be sure to limit the amount of crypto transfers made from external wallets into exchanges or custodianship accounts. Doing so will help ensure that all transfers are properly tracked and accounted for, minimizing any potential exposure due to mismanagement or theft of funds.
Using a Prime Broker That Offers Credit Risk Transfer
For added security against counter-party risk when trading digital assets, consider working with a prime broker who offers credit risk transfer (CRT) services. This type of service enables customers to transfer their credit exposures from one party (the prime broker) onto another (a partner with a large and stable balance sheet). Aplo is the only crypto prime broker that allows customers access to such services— we did this to ensure that those looking for added protection against counter-party risk when trading in the crypto markets can always find a prime broker they can trust.
Counter-party risk is an ever present hazard when trading in crypto markets; however there are several steps you can take to mitigate such risks. We recommend minimizing holding duration on exchange wallets, having credit lines with reputable actors, using Tier 1 jurisdiction licensed providers for brokerage and custody services, minimizing crypto transfers if self-custody is chosen as an option, and going through a prime broker who offers credit risk transfer services like Aplo. By taking the necessary precautions outlined above, traders can focus on their core business knowing they have done everything possible to protect themselves from unnecessary exposure due counter-parties’ mishaps, negligence or even malicious behavior.
If you’d like to find out more about Aplo’s Prime Brokerage services please drop us an email at contact@aplo.io.