Institutions Prioritize Security Over Convenience in Crypto Trading

The collapse of FTX in 2022 exposed a critical flaw in the traditional crypto trading model: counterparty risk. Under this model, exchanges acted as both trading venues and custodians, holding customer assets in unverifiable accounts. When FTX went bankrupt, clients discovered their funds had been diverted to Alameda, leading to widespread losses.

The industry has since recognized that separating custody from execution is essential for security. Off-exchange settlement models have emerged as a solution, isolating risk by keeping assets with third-party custodians or in self-custodied wallets. Exchanges are granted limited access to trading balances, but cannot unilaterally move or withdraw funds.

Companies like Fireblocks and Copper have developed off-exchange solutions that use Multi-Party Computation (MPC) cryptography to secure on-chain wallets. These systems have gained traction, with Deribit becoming the first exchange to fully integrate Fireblocks' Off-Exchange solution in 2024. HTX followed suit in 2025.

The approval of spot Bitcoin ETFs in January 2024 also contributed to the shift away from exchange custody. By design, these ETFs hold assets in cold storage vaults separate from any trading venue. The exchange where the ETF trades on the secondary market never touches the underlying Bitcoin, reducing counterparty risk.

Coinbase remains the dominant force in institutional crypto custody, holding over 80% of global crypto ETF assets. However, regulatory momentum is shifting towards more regulated custodians, with Coinbase receiving conditional approval for a national trust bank charter in April 2026.