Managing Counterparty Risk: Importance of Tri-Party Collateral Management in Crypto

As the crypto industry evolves, areas of demand and growth shift — and the need for tri-party collateral management with a qualified custodian is a business segment that’s currently expanding and moving to the forefront.

As the word “tri-party” indicates, there are at least three parties in this structure. This includes two parties that are conducting financial transactions with one another; they could be a borrower and a lender or two organizations making crypto derivative trades. The third party — the collateral management firm — will monitor and manage the assets involved in the relevant transactions.

BitGo’s collateral management structure accomplishes this by segregating collateral from the partners and exchanges involved to facilitate the desired financial settlements. The goal of this tri-party structure is to reduce counterparty risk in ways that appropriately manage the assets.

“This tri-party structure has long been integral in traditional finance with asset managers moving unencumbered assets to custodians who safely store those assets,” says Adam Sporn, the Head of Prime Brokerage and U.S. Institutional Sales at BitGo. “At BitGo, we’ve been bringing that market structure to digital assets to allow clients to safely scale their trading strategies. Most of the demand over the past several years has been related to crypto loan servicing but, post-FTX, we’re seeing an increased demand to segregate collateral for counterparties in a trade arrangement, including posting margin for derivatives.”

David Fogel, CEO of Coinmint’s operating subsidiary NCCS, adds, “BitGo’s tri-party collateral management solution allows our firm to safely scale our derivatives portfolio with the margin being held at BitGo instead of posted to our trading counterparties. With the focus on counterparty exposure and minimizing risk in digital assets, we think this is a product that provides additional security for us as we scale our trading strategies.”

Collateral management is more than just custody, Sporn explains. “As part of the process, excess collateral gets posted or returned according to margin requirements, reporting is provided to both counterparties, and assets are continually monitored to ensure they’re sufficient for the financial transactions between the counterparties.”

Tri-Party Collateral Management Solution at BitGo

As a qualified, regulated market leader in purpose-built custody solutions for digital assets, BitGo provides collateral management solutions for trading partner and exchange clients looking to segregate collateral. Comparable to tri-party TradFi arrangements, this solution lowers counterparty risk with BitGo because of the following:

• Assets are held at a bankruptcy remote entity

• $250 million insurance policy against theft or loss of keys exists with the ability to purchase additional coverage

• BitGo is SOC1 Type 2 and SOC2 Type 2 certified

• Ongoing reporting is provided to both counterparties

• This scalable solution allows trading partners to easily grow balances with multiple counterparties

Connect with us to learn more about the BitGo Collateral Management Solution.