FinchTrade's Margin-Based Model Challenges Traditional Prefunding in OTC Crypto Trading

In the world of over-the-counter (OTC) cryptocurrency trading, many desks require full prefunding to execute trades. This means that a payment provider wanting to convert 1 million euros would need to place 1 million euros with the desk before the trade is executed.

This rule protects the desk but puts all the costs on the client's balance sheet. For funds making occasional trades, this isn't a major issue, but for payment providers converting large volumes daily, it can be a significant burden.

A Swiss VASP and OTC crypto liquidity provider called FinchTrade has developed an alternative model that uses margin-based settlement instead of prefunding. This means the client posts a percentage of the trade value as collateral, and the desk executes at full notional, releasing the collateral when the trade settles.

The difference is significant: on a 1 million euro crypto-to-fiat trade at 30% collateral, the provider places only 300,000 euros and keeps 700,000 euros in its own accounts. This means that 70% of the capital stays with the business, rather than being locked up for settlement.

FinchTrade's model aggregates liquidity from multiple venues and uses smart order routing to execute trades efficiently. With this approach, payment providers can grow their businesses without hitting a working-capital ceiling, which is a major limitation of traditional prefunding models.