Bybit Introduces Off-Exchange Custody to Cut Counterparty Risk for Institutions on July 28

Bybit, a global cryptocurrency exchange, has introduced an off-exchange settlement system in collaboration with Cactus Custody, a digital asset custodian under Matrixport Group. The integration, set to launch on July 28, aims to reduce counterparty risk for institutional traders by keeping assets locked in custody until trades are finalized. This shift addresses longstanding vulnerabilities in crypto trading, where pre-funded exchange accounts and centralized custody models have left assets exposed to hacking, insolvency, and operational errors [1].

The system operates as a custody-backed intermediary, with institutions allocating collateral to Cactus Custody’s segregated, SOC 2-audited accounts. Assets only move to Bybit for settlement upon trade execution, ensuring they remain under custodial control until the final stage. This approach eliminates the need for pre-funded accounts, a practice that has historically tied up liquidity and increased exposure. Cactus Custody’s buffer accounts further consolidate liquidity across exchanges, enabling institutions to trade on Bybit without dispersing capital [1].

Security measures include dual-authorization workflows, real-time Know Your Transaction monitoring, and a cold storage setup where 95% of assets are offline. Cactus Custody claims its infrastructure repelled a 2023 breach attempt, underscoring the robustness of its defenses [1]. Bybit’s Institutional and Derivatives Head, Shunyet Jan, emphasized that the integration enhances liquidity management while maintaining asset security, a critical factor for institutions wary of crypto’s inherent risks [1].

The partnership follows Bybit’s survival of a $1.5 billion hack in March 2024, which forced the exchange to seek emergency loans to remain operational. The incident highlighted the fragility of traditional exchange models, where custodial failures can jeopardize both platform and user funds. By positioning custody as a proactive safeguard rather than a post-trade measure, Bybit aims to rebuild trust while aligning with regulatory trends. Hong Kong’s Securities and Futures Commission (SFC) has increasingly advocated for custody-execution separation under its Safeguards roadmap, suggesting such models may gain regulatory favor [1].

The integration reflects broader industry shifts toward institutional-grade security. Analysts note that off-exchange systems could become a benchmark for operational standards, compelling rivals to adopt similar measures to remain competitive [2]. Bybit’s approach also redefines custodial roles in crypto trading, transforming them from reactive tools to foundational components of trade execution. This innovation may incentivize exchanges to integrate custodians early in their design, potentially creating new revenue streams through custodial fees [2].

While Bybit did not disclose specific user adoption metrics or cost structures, the initiative underscores its focus on addressing systemic risks. The move aligns with broader market demands for transparency, particularly in the wake of high-profile exchange collapses like FTX. By prioritizing preemptive custody, Bybit signals its intent to position itself as a secure and institutional-friendly platform, a critical strategy as the industry matures [1][2].

Source: [1] [Bybit turns custody into first line of defense, not last] [https://coinmarketcap.com/community/articles/688113dd1337fa2746d3d380/]

[2] [Bybit turns custody into first line of defense, not last] [https://crypto.news/bybit-turns-custody-into-first-line-defense-not-last/]