FireBlocks will launch a trading system to address centralized foreign exchange risk

Multi-party computing (MPC) wallet provider FireBlocks has released a new transaction system for institutions using a centralized exchange, announced on November 28. The new system, called “Off Exchange”, allows institutional traders to exchange tokens without first depositing them on the exchange. Fireblocks says this system will help eliminate the associated risk on centralized exchanges and prevent future FTX-like failures.

Today, we're excited to launch Off Exchange, a new solution that allows businesses and asset managers to truly eliminate the risk associated with the exchange. → Read on pic.twitter.com/s4P5kyNy3O

— Fireblocks (@FireblocksHQ) November 28, 2023

In an interview with Cointelegraph, Michael Shaulov, the founder and CEO of FireBlocks, explained how Off Exchange works. It said it would allow businesses to deposit assets into a “shared” or “interlocked” MPC wallet, which consists of three hashes of its private key. The first shard is owned by the trading organization, the second by the exchange, and the third is “word of mouth.” For a transaction in this wallet to be verified, two of the three shards must be used to sign the transaction. This means that neither the trader nor the exchange can withdraw the assets unilaterally.

In most cases, transactions are confirmed when the exchange and the merchant sign the transaction, Shaulov explained. But if the merchant or the exchange does not respond for a certain period of time, the third-party oracle can provide a second signature under certain conditions. “For example, if one of the scenarios is that the exchange is hacked and doesn't respond for a period of time, the trader can essentially return the original without the exchange's permission,” Shaulov said.

According to the announcement, OfCurrency has already been implemented by institutional trading firms QCP Capital, BlockTech and Zerocap, which are used to trade on the Bitcoin central exchange. In the coming months, the team plans to support other exchanges including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako and Bitget. Off Exchange is currently only available to institutions, Shaulov confirmed to Cointelegraph.

Centralized crypto exchanges have historically been plagued by collateral risk issues. In the year In 2014, users lost more than $473 million on Mount Gox. In the year In 2018, Canadian crypto exchange Quadriga was shut down without refunding users' funds, causing a loss of over $169 million to users. The exchange was later accused by regulators of being a Ponzi scheme. In the year In 2021, investors lost about $8 billion when crypto exchange FTX stopped issuing. The exchange is now in bankruptcy and its CEO has been charged with fraud.

In its notice of exchange, FireBlocks said it would help prevent such incidents, saying it “stems from the unique structure of the crypto trading market, where exchanges play the role of both custodian and trading venue.” It stated that this issue will be avoided by “locking funds in secure MPC-based shared wallets”.