Risk migration in the crypto domain refers to the process where specific risks, or components of a risk exposure, move or shift from one entity, asset, or system to another. This often occurs as a result of strategic decisions or systemic interactions, changing the distribution of potential liabilities within a digital asset ecosystem.
Mechanism
Operational instances include transferring assets to a different custody solution to mitigate counterparty risk, using decentralized lending protocols to offload collateral management risk to smart contracts, or hedging spot market exposure with derivatives, thereby shifting price risk to an options or futures market. In institutional RFQ crypto trading, risk migration can happen when a firm transfers a position to a prime broker, moving execution and settlement risk.
Methodology
The strategic methodology behind risk migration involves a conscious decision to reallocate risk exposures to more appropriate or better-managed entities or systems. This requires a thorough understanding of the interdependencies within the crypto financial system and the capabilities of various platforms or protocols. Objectives often include reducing concentration risk, leveraging specialized risk management expertise, or achieving more favorable capital requirements, ultimately optimizing the overall risk profile of a digital asset portfolio or institutional operation.
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