Since FTX, Institutions No Longer Want to Keep Crypto on Exchanges

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.

How FTX Broke Institutional Trust in Exchange Custody

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 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.

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.

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

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

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. 

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. 

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.

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. 

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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The Rise of Risk Isolation Models

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.

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

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.

Copper’s ClearLoop is an off-exchange settlement solution in which assets remain in Copper’s MPC (Multi-Party Computation) custody. Trades settle on Copper’s own infrastructure.

Both systems have gained significant traction. Deribit became the first exchange to fully integrate Fireblocks OES in February 2024. HTX followed in April 2025. 

“Since the launch, HTX has onboarded numerous institutional clients and recorded a 200% increase in trading volume, validating market demand for secure off-exchange settlement models,” the press release read.

Copper’s ClearLoop now connects several live exchanges, including Coinbase, OKX, Bybit, Deribit, Bitget, and more, facilitating over $50 billion in monthly notional trading volume. The Bybit hack of 2025 further demonstrated the advantages of off-exchange settlement.

How Bitcoin ETFs Made the Separation Permanent

The approval of spot Bitcoin (BTC) ETFs in January 2024 did more than open a new investment vehicle. It hardwired the custody-execution separation into the most visible crypto product on Wall Street.

For instance, like many other ETFs, BlackRock’s iShares Bitcoin Trust ETF (IBIT) uses Coinbase Custody Trust Company, LLC. The structure is built so that Bitcoin sits in cold storage vaults, entirely separate from any trading venue. 

Creation and redemption of ETF shares follow an operational process in which assets move between the vault and trading balances within defined settlement windows. The exchange where IBIT trades on the secondary market never touches the underlying Bitcoin.

This is not an optional design choice. It is how ETFs work by definition. The custodian holds the asset. The authorized participant handles creation and redemption. The exchange handles price discovery. Three roles, three entities, no overlap.

Off-Exchange Trend Rises, but Coinbase Holds the Crown

While the shift away from exchange custody is real, the data suggest a more nuanced transition rather than a full-scale replacement. 

Despite the rise of off-exchange models, Coinbase remains the dominant force in institutional crypto custody. The firm currently holds custody for over 80% of global crypto ETF assets.

It also serves as custodian for eight of the top 10 publicly traded companies with Bitcoin (BTC) on their balance sheets. 

This dominance is further reinforced by regulatory momentum. In April 2026, the Office of the Comptroller of the Currency granted Coinbase conditional approval to charter Coinbase National Trust Company, a move that would allow it to operate as a federally regulated crypto custodian upon full approval.

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The significance of this shift is twofold. First, it strengthens Coinbase’s position as a qualified custodian, a key requirement for institutional investors such as asset managers, pension funds, and ETF issuers.

Second, it signals that while institutions are reducing exposure to exchange risk, they are not abandoning centralized players altogether.

Instead, capital is consolidating around a smaller group of regulated, systemically important custodians. This creates a hybrid market structure:

• Off-exchange infrastructure reduces direct counterparty risk
• Regulated exchanges and custodians continue to anchor institutional trust
• Market power concentrates in platforms that can offer both compliance and scale

In effect, the post-FTX evolution isn’t about eliminating intermediaries. It’s about redefining which intermediary institutions are willing to trust.

What Would Happen If an FTX-Scale Collapse Occurred Today

Amid growing attention toward off-exchange models, a natural question emerges: would an FTX-style failure still have the same impact on institutional capital?

Under the old model, an exchange collapse froze all deposited assets. Institutions became unsecured creditors in a years-long bankruptcy proceeding.

Under the current OES infrastructure, the outcome would differ substantially. If an exchange using Fireblocks OES collapsed, the institution’s assets would remain in its CVA. The principal never entered the exchange’s balance sheet. 

Fireblocks’ disaster recovery mechanism, powered by Coincover, also enables institutions to ensure operational security by eliminating single points of failure. The only exposure would be unsettled profit-and-loss from recent trades.

With ClearLoop, the English Law Trust would shield client assets from both exchange and Copper insolvency. Again, an institution’s loss would be limited to any unsettled trading obligations, not the total portfolio.

At FTX, institutions lost their entire deposited balance. Under OES, the same scenario would expose them to days of unsettled P&L at most. That is the difference the new plumbing makes.

That distinction highlights the real impact of crypto’s changing infrastructure. The industry hasn’t eliminated risk, but it has significantly reduced the scope of catastrophic loss tied to exchange failure.

Market Scale and What Comes Next

The institutional crypto custody market hit approximately $3.2 billion in 2024. It is projected to reach $27.8 billion by 2033 at a 26.7% compound annual growth rate. 

That growth reflects more than just new capital entering the market. It reflects a structural rebuild of how that capital is held, moved, and settled.

The next phase of that rebuild is already taking shape around tokenized collateral. Rather than locking up idle stablecoins or Bitcoin as margin on an exchange, institutions are beginning to use tokenized money market funds and yield-bearing stablecoins as on-exchange.

“Institutions aren’t chasing speculation; they’re chasing capital efficiency. Off-exchange settlement delivers that by putting custody and control back where they belong. As tokenised collateral and regulated venues converge, OES will become the default workflow for serious institutional participation,” Wing Cheah, Product Manager, Interchange, said.

Traditional banks are also entering the picture. In 2025, BBVA partnered with Binance to offer regulated off-exchange custody services to Binance’s institutional clients.

Nomura’s digital assets arm, Laser Digital, applied for an OCC license to open a national trust bank focused on crypto custody, spot trading, and staking for clients. 

These moves signal that the custody function is migrating from crypto-native firms into the broader financial system. Taken together, these developments point in a consistent direction.

The custody function is quietly migrating away from exchanges. Liquidity and price discovery remain on the trading venue, but the assets themselves increasingly do not.

What started as a post-FTX demand from a handful of institutional players is gradually becoming the default wiring of the market. The separation is not yet complete, but the direction has not reversed either.