Crypto started as a retail market but, as it has become increasingly institutional, issues such as collateral mobility and capital efficiency are becoming more critical.

As a result a panel discussed ‘Collateral Mobility in Crypto: Security and Capital Efficiency’ at the Digital Asset Summit 2024 in London on 19 March.

Crypto exchanges require pre-funding of the full amount of a transaction in order for them to match buyers and sellers quickly, but this locks up capital and increases the cost of trading for institutions.

Paul Kremsky, trader and global head of business development at Cumberland, the cryptocurrency trading unit of market maker DRW Holdings, said on the panel that the firm trades billions of dollars a day so the need for scale means it cannot constantly move assets on and off exchanges.

Mike Roberts, head of prime at Copper, said on the panel that the institutional digital asset solution provider had developed its ecosystem and its proprietary ClearLoop network in order to help overcome this challenge. ClearLoop allows institutional investors to trade more efficiently and securely with crypto exchanges by removing the need to transfer digital assets onto an exchange before being able to trade.

Roberts said: “Our integration with exchanges allows assets to be held off-exchange and they are insolvency remote which optimises collateral.”

For example Zodia Custody, a leading institution-first digital asset custodian backed by Standard Chartered, SBI Holdings and Northern Trust, partnered with Copper last December to provide clients with on-chain custody alongside access to off-exchange settlement and rapid settlement times of up to T+4 hours through ClearLoop to a number of exchanges including Bybit, OKX, Powertrade, Bitget, Gate.io, Deribit, BIT, and Bitstamp.

Luuk Strijers, chief commercial officer at crypto options and futures exchange Deribit, said on the panel that exchanges need to unbundle their vertical and partner with a variety of custodians.

“Clients will want a choice of custodians and exchanges need to facilitate that,” Strijers added. “In a few years clearing will develop to guarantee trades and that will unlock flow.”

Leo Mizuhara, founder and chief executive of Hashnote, an on-chain digital asset manager built with the support of Cumberland and DRW, said on the panel that crypto needs prime brokers to minimize collateral needs.

Mizuhara said: “In traditional finance it is normal to earn yield on collateral from custodians and prime brokers and crypto needs the same efficiency and mobility.”

Hashnote has joined forces with Copper, who will be providing custody support for Hashnote’s USYC, the asset manager’s tokenized yield-bearing asset that invests in short-term U.S. Treasury Bills held at BNY Mellon and primarily engages in repo-reverse repo activities. USYC can be used as collateral for OTC trading and for lending.

“Pre-funding all trade-in exchanges without earning yields is not an efficient use of collateral,” Mizuhara added. “We are at an inflection point with traditional financial institutions coming on board so we need to become more efficient.”

Kremsky said. He said: “The ball game has started for institutions and we need to be ready when they come.”