In his latest article, GFO-X CEO Arnab Sen reflects on crypto’s biggest stress test, the recent wave of liquidations, and what it revealed about the market’s structure.

Crypto’s Biggest Stress Test — and What It Really Showed

There’s been a lot written about the recent crypto crash, the most significant wave of liquidations in the market’s history. Some said, “The system worked as designed.” Others claimed “DeFi held up better than CeFi.” A few are finally calling for a stronger market structure for exchanges to be neutral trading venues with real rulebooks, transparency, and oversight. All of these views capture part of the truth. But none, in my mind, hit the right note. If crypto markets are ever to attract real institutional capital, they must evolve not just technologically, but structurally.

Exchanges That Aren’t Really Exchanges

I have long held the belief that Crypto “exchanges” aren’t exchanges in the traditional sense, and it is one of the primary reasons I set up GFO-X.

They combine almost every market function:  direct client onboarding, price matching, clearing, settlement, custody, leverage, and even proprietary trading. That makes them, effectively, brokers with extreme leverage and history is full of broker failures. Even in traditional FX, we recently saw the UK broker Argentex fall into insolvency during April’s sell off in USD.

This full-stack model, where the credit is difficult to manage due to the extreme leverage, drove the need for auto-liquidation. This was marketed as an innovation, but auto-liquidation often protects the venue at the expense of its clients.

In times of volatility, auto-liquidation exacerbates the price movements by causing further liquidation cascades – a vicious downward cycle (liquidation engines triggering further price drops triggering further liquidations), and crypto exchanges do not have the infrastructure to cope properly. During the sell-off, there were countless stories of profitable positions being closed out, fills not being sent back in a timely manner, inability to enter orders and collateral being trapped. Many clients were left wondering what their positions were. In any regulated setting, that outcome would be unacceptable.

Responsibility for Collateral and Risk

Some argue that clients are to blame for posting poor collateral. But in any properly regulated market, the Central Clearing Counterparty (CCP) is accountable for what it accepts. That is why clearing houses overwhelmingly prefer cash or highly liquid forms of collateral; it’s predictable, transparent, and liquid. Accepting illiquid or “toxic” collateral isn’t risk management; in fact, it is the opposite, and any good Risk Officer knows this. But if you can do so with no real repercussions, why not? When volatility hits, the cost is borne by participants, not the platforms, who likely benefit from the increased trading and auto-deleveraging.

Why Big Institutions Stay on the Sidelines

Institutional traders understand this risk. Their risk and operations teams price crypto exchange counterparty exposure carefully and cap it tightly for good reason. That is why we assert that there is no real institutional leverage in the system post-FTX, only retail leverage. If there were, with auto-deleveraging, the system would likely have crashed. It is also why major firms have gravitated to regulated, centrally cleared products, as they understand the rules set out by tier 1 financial regulators and exchange rulebooks, and can deploy the size they need using the credit intermediated/cleared model.

The rise in IBIT options volumes on regulated venues is no coincidence; it’s a sign that professional investors are choosing structure and transparency over opacity and hope.

Regulators and the Offshore Reality

Many have suggested that regulators should step in and request audits of last weekend’s events. The reality is more complicated. Most of the crypto exchanges at the centre of this debate are licensed in offshore jurisdictions. These regulators often lack the experience, mandate, or resources to perform deep supervision or investigations, and exchanges know it.

There’s a clear distinction between onshore and offshore regulation: one is designed to protect market integrity and participants; the other, too often, is just regulatory convenience. Onshore versus offshore is the game that has been played for years, as derivatives regulation, even for crypto, has always been clear, as evidenced by the CME BTC Futures being regulated and trading since 2017.

Can a CCP / FCM Model Work for Crypto Exchanges?

It’s a good and important question, and one that has been asked by crypto natives and TradFi industry titans alike over the last week.

In reality, a cleared model wouldn’t fit into the current crypto ecosystem. If a crypto exchange adopted a full CCP or FCM structure, it would immediately lose control of the leverage and margin it extends to its clients. Those controls would pass back to the intermediaries — the banks and non-bank FCMs who, in traditional finance, act as the end credit gatekeeper to institutional and retail customers alike. That’s the exact intermediation crypto venues were determined to bypass. It would restrict their ability to offer 50x or 100x leverage to retail users, which is a core part of their business model. This leverage drives some of the massive liquidity these venues supposedly support, the liquidity which many institutions want to trade against, and is the driver behind the need to support auto-liquidation. It is at the very core of their business model and profitability, and it is unlikely they will give that up easily.

Another reason that a CCP/FCM model won’t easily fit the current crypto market structure is that for clearing to really deliver benefits, contracts would need to be standardised and fungible across venues. A Bitcoin perpetual on Exchange X would have to be equivalent to the same product on Exchange Y. Can we realistically see today’s major crypto platforms collaborating and giving up control of their proprietary contract specs? Unlikely.

You can’t have your cake and eat it:

You can’t have excessive retail leverage and the return opportunities this generates for institutional trading firms while also asking for regulated transparency and institutional credibility. True clearing brings predictability, enforcement of contracts, transparency, and capital efficiency, but only when combined with sound leverage limits and risk discipline.

The Role of GFO-X in Evolving The Market Structure

Events like the previous weekend provide an opportunity to learn and grow. Market structure and technology limitations should not be seen as a sign of weakness in the underlying assets themselves, such as Bitcoin or Ethereum, although these often get conflated.

The obvious learning is that until we fix the market structure, real institutional capital will remain cautious. At the same time, arbitrageurs will always have a role to play, determined by their risk appetite.

Over time, the crypto market will likely evolve into a two tier market structure, which will be porous and intersect but may have minimal overlap:

• Offshore platforms offering significant retail leverage and the return opportunities this provides will persist, but they will likely continue to see limited institutional participation. Crowbarring their business model into a tier-1 regulated or Cleared / CCP structure will be extremely challenging, and
• New entrants will emerge to grow the institutional crypto market, build a more balanced, transparent structure, based on new technology, that unlocks genuine institutional credit and liquidity.

We’ve seen this story before. Markets evolve, but the fundamentals of sound risk management don’t change. This time, though, technology gives us the tools to do it right.

At GFO-X, we’re combining regulated, centrally cleared infrastructure connected to real credit intermediaries with the flexibility of 24/7 digital asset markets. Where transparency and technology work together, not against each other.

The goal isn’t to replicate TradFi, it is to evolve it.