An arm’s-length transaction is a business deal where buyer and seller act independently and without special relationship or influence, ensuring fair market terms and pricing. In crypto markets, this principle is crucial for establishing legitimate valuations for digital assets and preventing collusion or self-dealing, particularly in over-the-counter (OTC) or request-for-quote (RFQ) environments. It affirms that both parties operate solely for their own best interest, reflecting true market dynamics.
Mechanism
This transaction mechanism requires independent negotiations and unbiased pricing, free from direct control or affiliation between counterparties. Within crypto, this means trades on decentralized exchanges, institutional OTC desks, or smart trading platforms must occur without preferential access to information or terms based on undisclosed relationships. Protocols may incorporate mechanisms, such as transparent order books or auditable smart contract execution, to demonstrate the independent nature of pricing and settlement.
Methodology
Establishing an arm’s-length methodology involves implementing governance structures and operational protocols that isolate transacting parties and verify their independent status. In the context of crypto investing, this includes robust know-your-customer (KYC) and anti-money laundering (AML) checks to identify beneficial owners and prevent related-party transactions from distorting market integrity. Compliance frameworks often mandate independent valuation methods and audit trails to substantiate that asset transfers and pricing reflect competitive market conditions, rather than preferential arrangements.
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