Over-the-counter desks are now allowed by the cryptocurrency settlement solution provider in a bid to evade the responsibility of cryptocurrency custody and also to minimize counterparty risk.
An Israel startup known as Tango, offers non-custodial clearing services piloted trading options with OTC firm GSR Markets. In this case, the OTC desk was not given the seller’s collateral in advance. Instead, the seller was made to deposit his collateral with three key shares in a digital bank (wallet).
The three key shares were to be stored separately by GSR, an arbitrator agreed upon by all, and the seller. For funds to be accessed in the wallet and transferred, two of the three keys have to be available for the transaction to go through. Tango CEO Dan Danay says that the design distributes the custody responsibility to three parties, and at the same time, the collateral is still deposited.
Right now, traders have to deposit their money with exchanges and OTC desks before they can start trading. This activity could potentially expose traders to the risk of losing their hard-earned money in the exchanges.
Such a problem was taken care of by clearinghouses in the traditional asset trading system. The clearinghouses acted as middlemen between traders and OTC desks to guarantee the trade goes on as expected.
KeyTango is said to secure its wallet using a multi-party computation. This is a technique whereby several key shares are created, kept separately, and must be computed collectively to facilitate a trade. This technique, however, does not require all the three keys to authorize a transaction; only two keys are needed for the deal to go through.
Another cryptographic scheme, multi-signature, has been enhanced to secure digital wallets and also facilitate the settling process of MPC by KeyTango. The CEO, however, was quick to say that multi-signature did not fully satisfy KeyTango’s wishes to settle in distinct cryptocurrencies.
A clearinghouse is still needed to avoid counterpart risk from either side of the trade even though non-custodial trading is for decentralized exchanges.