Segregation of Exchanges, Market Makers and Custodians Necessary for Crypto Businesses to Thrive
The cryptocurrency sector may be advancing, yet industry experts are becoming aware that exchanges, market makers and custodians must act as separate entities in order for businesses to succeed. While it’s common to keep financial actors separated within traditional finance, this concept has often gone overlooked within the cryptocurrency industry.
Caitlin Long, chief executive officer and founder of Custodia – a chartered U.S. bank specializing in digital assets – told Cryptonews that many individuals within the cryptocurrency space are unaware of how unusual it is for market makers, exchanges and custodians to operate as the same entities. “This is a major problem the industry faces. I truly believe that, especially custodians, should be segregated so we don’t have shenanigans like FTX happening again,” she said.
To put this in perspective, Margaret Rosenfeld, chief legal officer at Cube.Exchange – a hybrid crypto exchange – told Cryptonews that the collapse of cryptocurrency exchange FTX occurred because financial actors were not kept as separate entities. She said:
“The biggest issue with FTX was that the exchange acted as a custodian with its own market maker. When Alameda Research hedge fund began losing money – which was the market maker on the exchange – FTX accessed its customer assets in an attempt to solve the problem.”
Rosenfeld added that although market makers are needed to provide liquidity for crypto exchanges, she pointed out that this creates a conflict. “We call this ‘founder’s risk.’ If someone is going to be a custodian of customer assets, the platform must be a highly regulated entity to ensure that those running the business will not misuse customer funds.”
Fortunately, businesses operating within the
