The volatility of digital assets and cryptocurrencies is a given, but adding more complexity and risk in terms of market structure will only further impede participation by a broader set of institutional investors. A closer look at the custody and OTC models being utilized and the challenges surrounding delivery-versus-payment (DvP) mechanisms reveals that as the crypto market evolves, so, too, are solutions to address the thorniest issues.
Centralized Exchange Model
The centralized exchange model is the dominant approach for trading digital assets and cryptocurrencies in public blockchains because it solves the limitation of numerous blockchain protocols relating to trading speed and settlement fees. (Mining fees are per transaction rather than the traded value.) However, this poses significant issues for the market in that parties to a trade are exposed to the security of the crypto exchange during the transaction process. As a result, there is growing skepticism about the relevance of the centralized exchange model, and most institutional participants are utilizing OTC mechanisms to facilitate trading and settlement of crypto assets.