Nickel Digital says 63% of crypto trading volume is via OES

• Nickel Digital advocates for increased integration of off-exchange settlement in crypto, noting that OES solutions can dramatically reduce fraud and bankruptcy risk
• Analysis shows that 63% of daily crypto trading volume is currently on 7 of the largest crypto exchanges that integrate OES solutions.
• The FTX implosion catalyzed further integration of the solution as platforms sought to reduce counterparty risk.

Nickel Digital Asset Management, a London-based investment manager authorized by the Financial Conduct Authority (FCA) and registered with the US Commodity Futures Trading Commission (CFTC), says cryptocurrency exchanges can do more to reduce fraud and counterparty risk.

According to the British hedge fund manager, crypto can achieve the above goal if more crypto exchanges join a core group of platforms currently integrated with Off Exchange Settlement (OES) solutions.

OES, which allows for off-exchange settlement that leverages the benefits of cryptonative tools such as on-chain visibility, has the capacity to not only significantly reduce counterparty risk, but also help market participants better protect investors from events such as the shocking collapse of crypto exchange FTX.

Anatoly Crachilov, CEO of Nickel Digital, noted in a statement:

“We believe OES is the best way forward to reduce counterparty risk in the crypto ecosystem, eliminating the need for investors to hold their capital on trading venues.”

63% of daily crypto volume on 7 top exchanges using OES

Nickel, Europe’s leading digital asset investment manager founded by Goldman Sachs, JPMorgan and Bankers Trust alumni, already says 7 of the top 20 crypto exchanges had integrated with OES by March 15, 2023.

Another platform is in the process of integrating the solution, which will push the total daily trading volume on OES-supported platforms from 63% to almost 70%.

Recent analysis by Nickel also showed that 11% of daily trading volume is on a few well-established platforms, including Coinbase, Kraken and Bitstamp. These exchanges are regulated in Europe and the USA.

Interestingly, only 5% of the daily trading volume was on exchanges that integrate OES before the FTX collapse. Nickel’s latest study shows that the FTX debacle catalyzed the introduction of off-exchange settlement at four exchanges.

How does the OES flow work?

According to Nickel Digital, an optimal OES flow is one that integrates four entities – an exchange, a custodian, trusted third party (to provide a mechanism for dispute resolution) and a trader (client of the crypto exchange and the custodian).

With OES integration, clients deposit funds with a highly regulated custodian. An exchange then only “mirrors” these funds for the purpose of trading, meaning that all client money remains off-exchange and safe in the event the exchange implodes.

For example, UK-based crypto platform CoinFLEX had integrated Clearloop (an OES version offered by Copper). When the exchange went into receivership amid the fallout from FTX, Copper’s clients did not suffer any losses related to Coinflex’s problems.

Aside from FTX, some of the top exchange implosions and bankruptcies include Mt.Gox, Liquid, QuadrigaCX, Cryptopia.

Nickel believes crypto could attract more from institutional investors if the sector offers robust protection mechanisms for investors’ assets. As part of this goal, the digital asset manager has released a paper that discusses the main, widely accepted custody arrangements and market standards for OES solutions.