Crypto market structure is getting a Wall Street rethink. A cohort of former foreign-exchange executives is importing the ECN playbook to separate trade matching from custody and credit — a design they say is essential to win institutional trust and shed crypto’s “one-stop shop” risk.
Key Points
The effort is modest in size but pointed in intent. Firms like Crossover Markets, Finery Markets, and Cypator argue that clear separation of duties can turn volatility into a manageable feature rather than a systemic flaw.
Why Crypto Market Structure Is Changing
In traditional FX, the electronic communication network (ECN) sits between counterparties, matching orders on neutral ground while banks extend credit and custodians safeguard assets. That architecture spread risk, reduced conflicts, and helped FX scale into a multi-trillion-a-day market.
Crypto evolved differently. Many exchanges hold client assets, extend credit, run matching engines, and warehouse risk in the same stack. The collapse of FTX spotlighted how concentration can magnify shocks. The push to remake crypto market structure aims to decouple these functions, bringing clearer governance and stronger guardrails for big balance sheets.
Brandon Mulvihill — who helped run currency prime brokerage at Jefferies — co-founded Crossover Markets with Anthony Mazzarese and Euronext FX’s former CTO to build a venue that only matches orders. Custody and credit are left to third parties. The message to institutions is straightforward: you are no longer captive to a single, integrated exchange.
Inside the ECN Blueprint
- Matching only: ECNs match buyers and sellers but do not custody assets or extend credit.
- Credit intermediation: Prime brokers set limits and absorb counterparty risk, stopping new positions before losses cascade.
- Neutral venue: Participants face each other through a central limit order book or bilateral streams while assets sit with custodians.
That model reframes crypto market structure as a network of specialist roles rather than a monolith. Advocates say it reduces conflicts, improves transparency on limits, and helps large orders find depth without telegraphing intent.
Stress Test for Crypto Market Structure
The October selloff offered a live-fire test. Roughly $19 billion in leveraged positions was wiped out in hours, revealing how auto-liquidation engines at bundled venues can amplify moves when trading, credit, and custody are tightly coupled.
ECN-style platforms reported a different experience. Crossover’s CROSSx linked to prime brokers like Hidden Road and custodians such as BitGo, executed tens of thousands of trades, and stayed online through the turbulence. With credit limits enforced by the prime broker, exposures were capped before forced liquidations spiraled.
For reformers, the lesson is not that crypto is too volatile; it is that crypto market structure can absorb shocks better when roles are split.
Who’s Building the New Stack
- Crossover Markets: Matching-only venue focused on institutions, connecting to prime brokers and custodians.
- Finery Markets: Venue separating execution from post-trade functions, with growing institutional flow.
- Cypator: ECN for digital assets with a prime-broker-centered risk model.
Volumes remain small next to giants like Binance and Coinbase — Crossover handled about $13 billion last year; Finery doubled to $5 billion in Q1 — but they signal early institutional demand for a different crypto market structure.
What Institutions Want Now
- Discretion and depth: Big funds need to move size without moving the market. ECNs offer bilateral trading and thicker aggregated liquidity.
- Flexible credit: Trading on credit lines, not full pre-funding every time, improves capital efficiency.
- Segregated custody: Assets held with recognized custodians reduce operational and counterparty risk.
- Lower signaling risk: ECN workflows minimize visibility on block execution, reducing front-running concerns.
Market makers and prime brokers say sophisticated strategies — statistical arbitrage, spread capture, cross-venue liquidity provision — are increasingly migrating toward ECN rails where execution quality and risk control look more like FX.
The Missing Piece: Prime Brokerage at Scale
A fully functional ECN ecosystem depends on robust prime brokerage. In FX, large banks extended credit and guaranteed settlement, enabling institutions to trade without cashing up every order. In crypto, most venues still require full collateral up front.
Building crypto prime brokerage is hard: deep balance sheets, bank-grade compliance, and 24/7 risk management are table stakes. Several non-bank players have stepped in, but the network is nascent. Without it, the benefits of an ECN-centric crypto market structure cannot scale to the largest funds.
Can the FX Blueprint Really Fit Crypto
Skeptics see important differences. FX flows are dominated by institutions with stable hedging needs; crypto remains fragmented, retail-heavy, 24/7, and highly volatile. Some argue that integrated exchanges deliver tighter spreads and lower fees by pooling functions.
Supporters counter that coexistence is the point. Retail-first exchanges can continue serving everyday users, while ECN-style venues cater to funds that prioritize credit, discretion, and specialist custody. Over time, both models could interlink through shared settlement and standardized risk pipes.
Policy and the Regulatory Backdrop
Advocates say the institutional shift is occurring amid a more permissive tone in Washington, even as details vary by agency and jurisdiction. The goal for ECNs is to align with familiar frameworks — clear roles, auditability, and robust supervision — to fit into compliance playbooks that CIOs and risk committees already know.
Beyond the US, regulators in Europe and parts of Asia are sketching rules that emphasize segregation of client assets and transparent market operations. Those priorities map closely to the ECN model, reinforcing the case for a redesigned crypto market structure.
Liquidity, Data, and a 24/7 Clock
Crypto never sleeps. Any ECN for digital assets must support fractional trading, continuous uptime, and high-throughput matching across time zones. That is a departure from FX, where liquidity ebbs through weekends and holidays.
Spot volumes continue to concentrate on integrated exchanges, according to CoinDesk data. ECN-style venues aim to attract a slice of that flow by aggregating bilateral streams and top-tier makers into deeper books, especially during off-peak hours when slippage is worst.
What Better Design Looks Like in Practice
- Limits enforced upstream: Prime brokers throttle exposure before it becomes a liquidation spiral.
- Assets off-exchange: Custody segregation reduces the blast radius if a venue fails.
- Clear roles and audits: Each participant’s responsibilities are defined, measured, and examined.
- Interoperable rails: Settlement, clearing, and risk data move across institutions without manual workarounds.
In that world, the crypto market structure starts to look like FX or equities plumbing adapted to 24/7 assets.
Headwinds to Watch
- Economics: Matching-only venues rely on tight fees at relatively low volume; scale takes time.
- Network effects: Liquidity begets liquidity; breaking incumbent moats requires consistent depth.
- Credit capacity: Prime brokerage must expand to support hedge funds that deploy hundreds of millions per strategy.
- Cultural shift: Some crypto-native traders prefer all-in-one venues and instant cross-margining.
- Regulatory clarity: Global alignment on custody, capital, and market-abuse rules remains uneven.
These hurdles do not negate the project, but they slow it down. The equity story for ECN builders is patience: add participants, deepen bilateral lines, and let execution quality pull volume over.
Early Signals and Market Responses
- Market makers: Firms like Keyrock and GSR see value in bilateral execution and lower signaling risk for large orders.
- Prime brokers: Hidden Road and others report more sophisticated flows moving toward ECN rails as credit lines expand.
- Exchanges: Incumbents argue integration improves liquidity and keeps costs down, and they are likely to remain dominant for retail.
- Hybrid futures: Even exchange executives acknowledge ECNs can be a “welcome addition,” with both models coexisting.
Together, these signals suggest the crypto market structure is entering a pragmatic phase: not a revolution overnight, but a gradual unbundling as institutional money demands familiar safeguards.
What to Watch Next
- Prime brokerage buildout: New entrants, balance-sheet commitments, and standardized limit-management.
- Custody integration: Seamless links between ECNs, custodians, and settlement providers.
- Execution metrics: Slippage, fill ratios, and depth during stress across ECNs versus exchanges.
- Policy milestones: Rules on client asset segregation, capital, and market integrity.
- Connectivity: More banks, hedge funds, and makers are lighting up bilateral streams.
Each step makes the ECN case more tangible — and moves crypto market structure closer to Wall Street’s model.
Conclusion
The push to rebuild the crypto market structure mirrors the FX journey two decades ago: separate the core functions, reduce conflicts, and let specialists do what they do best. ECN-style venues are still niche, but they offer a credible path to institutional scale by decoupling matching from custody and credit.
If prime brokerage deepens, custody remains robust and policy continues to favor segregation and auditability, ECN rails could anchor a safer, more liquid institutional market. Exchanges are not going away; instead, a two-track future is emerging — retail-first platforms alongside institutional ECNs — with bridges between them. That, proponents say, is how trust and scale take root.
FAQ’s
What is the crypto market structure, and why does it matter?
It’s the framework for how trading, custody, and credit are organized. Institutions favor a separate crypto market structure to reduce conflicts, improve risk control, and protect assets.
How do ECNs differ from crypto exchanges?
ECNs only match orders between counterparties. Custody and credit sit with third parties, while most exchanges bundle trading plus asset holding, plus lending in one place.
What role do prime brokers play in the crypto market structure?
They extend credit lines, set risk limits, and smooth settlement so funds avoid full pre‑funding. The network is early in crypto, which limits scale until more balance sheet capacity develops.
Will ECN‑style venues replace exchanges?
Likely coexistence. Retail flow may stay on integrated exchanges while large funds use ECN rails for discretion, credit efficiency, and segregated custody, with bridges deepening liquidity over time.
Article Source: Bloomberg
Image Source:
