Since Ftx, Institutions No Longer Want To Keep Crypto On Exchanges

What Happened

The collapse of FTX exposed a critical flaw. Investors were taking on massive, often invisible counterparty risk. FTX operated as an exchange, custodian, lender, and clearinghouse all in one

What had been considered operational efficiency was suddenly recognized as a structural vulnerability. Customer assets were not held in verifiable, on-chain, segregated accounts. When the firm filed for bankruptcy, clients discovered their funds had been diverted to Alameda.

The damage extended well beyond FTX’s direct users. Galois Capital, a former registered investment adviser, shut down after half its assets were stuck on FTX when the exchange collapsed.

Investors who believed they were holding assets learned they were, in legal terms, unsecured creditors.

The former launched Fireblocks Off Exchange in November 2023. Off-Exchange offers Collateral Vault Accounts (CVAs).

Market Context

Institutions are accelerating their adoption of crypto, with major players steadily entering the market and expanding their exposure to digital assets. But while participation is rising, the way these institutions engage with the ecosystem has fundamentally changed.

The old model, where funds parked large amounts of capital directly on crypto exchanges, is being replaced. In its place is a new architecture where trading and custody are no longer intertwined.

“Counterparty risk awareness in crypto comes in cycles, and the recent major cyber-attack has triggered one of the largest waves of exchange derisking since FTX. It is yet another reminder that separating crypto custody from exchange trading is essential for security,” says Dominic Lohberger, Sygnum Chief Product Officer.

Before 2022, the dominant strategy was simple. Deposit funds onto an exchange, execute trades, and leave capital there for convenience and speed. Exchanges acted as both trading venues and custodians. That model worked, until it didn’t.

The traditional crypto trading model required institutions to deposit funds into an exchange before placing a trade. The exchange held both the assets and the execution function, thereby concentrating risk in a single entity.

Trading still happens on exchanges, but with a key difference. Exchanges are granted limited access to a trading balance or credit line, typically backed by assets held in custody.

These are on-chain wallets secured by Multi-Party Computation (MPC) cryptography. When an institution deposits assets into a CVA, the connected exchange receives a trading credit.

Why It Matters

Off-exchange settlement, or OES, flips this model. This new class of infrastructure is designed specifically to isolate risk. Assets remain with a third-party custodian or in a self-custodied wallet.

The Rise of Risk Isolation Models

Details

How FTX Broke Institutional Trust in Exchange Custody

In September 2024, the SEC fined Galois $225,000 for failing “to comply with requirements related to the safeguarding of client assets.”

The Celsius bankruptcy added another layer of alarm. A US bankruptcy court ruled that customer deposits into Celsius Earn Accounts became the property of the debtors’ estate, not the depositors.

Research from Coalition Greenwich found that institutional-grade cold storage and exchange wallets were equally popular before the FTX collapse. That changed overnight.

The industry mantra “not your keys, not your coins” evolved from a philosophical stance into a compliance requirement.

What Off-Exchange Settlement Actually Looks Like

Instead of holding assets on exchanges, institutions now store them with third-party custodians. These custodians, often regulated entities or specialized infrastructure providers, secure funds in segregated wallets.

The exchange can execute trades, but it cannot unilaterally move or withdraw the underlying funds. Settlement happens separately, often on a net basis after trades are completed.

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In traditional finance, this separation between custody and execution has existed for decades. Crypto lacked this structure until several companies, including Fireblocks and Copper, built it.