External custody for crypto-currency derivatives aims to make transfers of collateral faster


The Deribit cryptomoney derivatives platform is launching a new off-site custody solution designed to assist with faster collateral transfers and reduce the risks of automatic deleveraging in volatile markets.

On May 14, the Panama-based exchange announced its full integration of the new solution, which was developed by London-based digital asset infrastructure provider Clearloop.

Deribit is providing the new solution to professional traders, claiming that such improvements in the structure of the crypto-derivatives market will boost the adoption of crypto-currencies among institutional investors.

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How does Clearloop’s custody solution work and what are the implications for traders?
The custody solution is designed to eliminate the need for asset managers to move their cryptosystems from secure cold storage to hot wallets on the exchanges for trading.

In addition to presenting security risks, the transfer of collateral between wallets and exchanges can result in delays of up to one hour, depending on the time required for confirmation in a given

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network. Delays can be further aggravated by withdrawal times after the trade is settled.

Instead, Clearloop offers a solution for the over-the-counter solution between the parties. This works through Clearloop’s mezzanine operations, which it says eliminates the risks of self-custody, and provides asset managers with a segregated and insured custody solution.

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For any position submitted by a trader, ClearLoop first ensures that both the client and the exchange have enough assets assigned to cover it before it is opened, and then it is instantly liquidated between the parties once the trade has been closed.

By making the transfer of customer collateral faster, Clearloop claims that traders will be better protected against the risks of automatic deleveraging and other disadvantages associated with market inefficiencies. It highlights the chaos in the market in March:

„Chain transaction costs increased up to 5 times, and the waiting time for quick confirmation was about 20 minutes. In fast moving markets, traders cannot add or move their margin fast enough to meet margin calls or take advantage of arbitrage opportunities. This limits their ability to trade, exaggerates price movement, and can lead to significant trading losses.

By allowing faster reaction times, traders will apparently be able to execute significantly higher volumes per trade, as well as avoid the limitations on the value of crypto-currencies that can be stored in hot wallets, which exchanges generally require to mitigate security and counterparty risks.

The company emphasizes that with its solution, assets never leave the custody environment and that all deposits and off-exchange settlements are closed within milliseconds.

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Risks of automatic deleveraging in the crypto-currency derivatives market
As recently reported, some Binance traders have recently claimed that their winning short trades were unfairly interrupted due to the platform’s automatic deleveraging system.

Platforms such as Binance and BitMEX have created insurance funds whose main objective is to prevent successful traders from self-leveraging their positions to avoid bankruptcy of the positions being liquidated. There has been a recent controversy over the use, or lack thereof, of BitMEX’s fund during a mass settlement event on their platform in March.