Rethinking Operational Resilience

The FTX collapse of 20022 marked a pivotal moment for the digital assets industry. Institutional managers collectively recognized, virtually overnight, that their approach to counterparty risk required reassessment. This event catalyzed a broader evolution that continues to unfold today, fundamentally transforming operational frameworks for institutional digital assets investment managers looking to be more sophisticated. 

Phase 1: Exchange Agnostic

The FTX failure represented more than just another cryptocurrency exchange bankruptcy. It delivered a profound wake-up call that reverberated through institutional trading desks globally. Managers who previously believed their operational risk frameworks were robust - because of status quo - suddenly confronted two sobering realities:

• First was the genuine existential threat of complete asset loss when concentrated on a single exchange, coupled with the uncertain and protracted recovery process that typically follows such events. The ongoing litigation surrounding FTX assets serves as a stark reminder of this risk

• Secondly was the significant operational disruption caused by the sudden unavailability of a primary trading venue in a market characterized by perpetual trading hours and exceptional volatility

Institutional managers swiftly established connectivity across multiple trading venues. This diversification strategy was not merely to distribute counterparty exposure but to ensure continuous trading capabilities in the event any single exchange became compromised. The interconnected nature of digital assets market participants, clearly demonstrated by the cascading impact of the FTX collapse, necessitated a broader exchange diversification strategy than typically required in traditional markets.

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Phase 2: Custodian Agnostic

While exchange diversification occurred rapidly out of immediate necessity, the transition toward multiple custodial relationships has followed a more measured yet equally important trajectory. The implications of custodial vulnerability are considerably more severe than exchange disruption - especially as a result of Managers moving their assets off exchange as a result of ‘Phase 1’. Custodians safeguard spot positions - often representing the majority of assets under management. When a custodian experiences a security breach or business failure, the potential impact far exceeds the operational challenges posed by exchange unavailability.

We’ve observed Managers methodically implementing multi-custodian architectures, driven not only by risk management imperatives but also by the specialized capabilities different custodians offer (E.g., cold storage security, efficient movement of assets across hot wallets, self storage, etc.). Forward-thinking Managers now maintain relationships with multiple custodians that integrate seamlessly into their operational framework. This diversification principle extends beyond crypto-native services. The account freezes associated with Silicon Valley Bank in 2023, a traditional banking partner, significantly disrupted digital assets Managers due to the bank’s substantial presence in the sector. This event prompted managers to establish secondary banking relationships creating multiple fiat custody options and maintaining reliable connectivity between traditional finance and digital assets markets.

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Phase 3: Execution Agnostic

The natural progression of this multi-counterparty approach leads to execution agnosticism. At QIS Risk, we identify this as a crucial next development in operational resilience.

While established Execution Management Systems (EMS) have emerged with compelling operational benefits, they introduce a new concentration risk - the aggregation of private API keys within a single platform. Should an EMS become compromised, a Manager with centralized key management faces potential catastrophic exposure. The aggregation of which undoes all the efforts to increase counterparty diversification. Trading teams inevitably develop preferences for specific execution interfaces and workflows. However, exclusive reliance on a single EMS increasingly represents an unacceptable risk profile for sophisticated Managers. The ability to rapidly transition execution methodologies without disrupting broader operations has become essential.

This requirement extends beyond maintaining alternative execution pathways. A consistent data layer must underpin all execution activities - providing operations and finance departments with reliable portfolio visibility regardless of the active execution channels. Without this foundation, managers risk fragmented portfolio and exposure analysis.

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Conclusion: Importance of Being Counterparty Agnostic

The evolution of multi-counterparty models in digital assets has been driven by market events. From the urgent post-FTX diversification of exchange relationships to the methodical establishment of multiple custodian partners, the market has consistently progressed toward more resilient operational frameworks.

Creating an execution agnostic operating model represents the logical continuation of this evolutionary path. The reality of digital assets management is that operational disruption remains an ever-present risk. Successful managers will be those who build adaptability into their infrastructure - maintaining the capability to pivot execution strategies without sacrificing portfolio visibility or optional workflows. This principle guided our development of QIS Risk - our objective was not to replace execution systems, but rather to ensure consistent portfolio, risk, and performance visibility regardless of which execution approach a Manager employs.

In a market defined by continuous adoption, the ability to maintain operational flexibility without compromising analytical capabilities is no longer merely advantageous but now is essential. Leading digital Assets Managers have recognized this imperative while others will likely discover its importance through challenging circumstances / market turmoil.

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QIS Risk as an Execution Agnostic Portfolio Monitoring Systems

Ensuring execution agnosticism has been a core design principle at QIS Risk since our inception. Our platform was architected around the understanding that Managers require flexibility in execution, while maintaining consistent data governance and comprehensive risk oversight. This approach delivers tangible operational advantages such as:

• Investment teams maintain autonomy over their established processes. They continue utilizing their preferred decision-making and execution methodologies while gaining the benefit of unified data aggregation. This ensures front-office functionality remains uninterrupted while providing consistent visibility to downstream data consumers

• Unified system integrates data all asset classes, both digital and traditional investment vehicles. This comprehensive approach acknowledges that institutional digital assets exposure doesn’t exist in isolation but must be understood within the context of the overall portfolio

• Perhaps most significantly, this model ensures operational adaptability. As requirements evolve or new trading venues emerge, components can be integrated or removed without compromising underlying data integrity or analytical capabilities