Collateral Reinvented: How Institutional Standards Are Reshaping Digital Asset Markets

Over the past decade, crypto has seen many dramatic events that have reshaped market practices and investor expectations. Early collapses such as Mt. Gox and, more recently, the likes of Celsius and FTX, have highlighted the vulnerabilities inherent in a nascent ecosystem. Failure in internal controls, poor risk management, and inadequate custody solutions led to substantial losses for investors who held assets on trading platforms, which are not designed to have the same protections as custody solutions. These crises not only exposed the dangers of a market operating without robust safeguards but also sparked an industry-wide reassessment of how client assets, including collateral, should be handled.

The lessons learned pushed market participants towards adopting more secure, transparent, and regulated methods to protect assets and restore trust.

The rise of custodians

In the early days, many crypto exchanges managed digital assets through in-house wallets, a model that proved risky when trust was compromised.  Historically, many exchanges had been reluctant to validate their token reserves, which added to the speculation that the industry lacked transparency.

Today, a number of larger exchanges have dedicated custody arms integrated to provide these assurances but more importantly independent, third-party digital asset custodians have emerged as a fundamental part of the institutional ecosystem, offering state-of-the-art security measures including cold storage protocols that significantly reduce the risk of hacks and mismanagement and, given their impartiality to exchanges, can better protect investor assets.

These custodians operate under dedicated frameworks and technology standards, thereby providing their clients with a more secure environment for their holdings. This evolution marks a transition from a trust-minimised model based solely on decentralised self-custody, to a hybrid approach that marries cutting-edge technology with traditional risk management practices.

Evolution of collateral models

The evolution of collateral in the crypto world can be seen as a journey from instability toward greater solidity.

For institutions trading via exchanges, we have seen a move away from holding collateral directly on exchange. Instead, collateral can now be held in wallets by the custodian, supported by a tri-party and Account Control Agreement wrapper to ensure assets are not only protected but, importantly, mirrored on exchanges so firms can use them to trade while materially mitigating counterparty credit risk before settlement takes place.

Learn more about how we facilitate this at Zodia Custody through our flagship product, Interchange.

Diversifying collateral: From stablecoins to institutional-grade assets

As digital asset infrastructure evolves, so do expectations around collateral efficiency. Stablecoins continue to dominate, valued for their price stability and on-chain liquidity. Yet their lack of inherent yield may limit their appeal for institutions looking to optimize how capital is deployed—prompting a reassessment of what constitutes optimal collateral in increasingly sophisticated frameworks.

Therefore, we are seeing institutions broadening their collateral mix to include yield-generating instruments such as Tokenised Money Market Funds (TMMFs) and traditional safe-haven assets like US Treasuries. These assets – typically not used for trade settlement – are increasingly deployed like initial margin in traditional finance, prized for their stability, liquidity, and reliable valuations.

Held with custodians and pledged via tri-party arrangements, these instruments mirror exposure onto digital asset exchanges, enhancing transparency, security, and asset segregation. This signals a shift toward institutional-grade risk management standards rooted in conventional finance.

Momentum has grown recently, with major banks and asset managers embracing the tokenisation of real-world assets (RWAs) and recognising the viability of digital collateral backed by established issuers. The ability to pledge instruments like US Treasuries in support of digital asset trading activities reflects growing comfort among traditional institutions with blockchain-based markets – and vice versa.

Future trends: Navigating centralisation in a decentralised ecosystem

As global regulators begin to offer clearer guidelines for digital assets, collaboration between crypto-native firms and traditional financial institutions is expected to deepen further, paving the way for hybrid models that blend the strengths of both sectors. This maturing landscape reflects a gradual but profound shift from the unregulated frontier of a decade ago toward a more stable, interconnected financial ecosystem.

Beyond collateral, one of the more complex developments is the growing integration of centralised infrastructure into an ecosystem originally built for decentralisation. As institutional adoption grows and regulation becomes more defined, centralisation is increasingly viewed not as a contradiction, but as a practical path to scalability, compliance, and market maturity.

This evolution brings benefits – regulated custodians and institutional structures improve risk management, asset protection, and operational standards. Yet, it also introduces trade-offs: centralised models may curb the permissionless innovation that has propelled blockchain development.

If frameworks akin to traditional market infrastructure – like central clearing or securities depositories – gain traction, they could bolster system stability but reshape participation models, potentially diluting decentralisation in practice.

Ultimately, the challenge is to strike the right balance: adopt institutional infrastructure where it delivers value, while preserving the open, interoperable foundations that have made blockchain a force for financial innovation.