Chris MihosMost losses that feel like bad luck turn out, on closer inspection, to have happened at one of the handoffs.
Very little capital is held directly, because between you and the asset you think you own there’s usually a chain of other parties, perhaps a platform, a custodian, an exchange, a fund, a stablecoin issuer and whoever holds that issuer’s reserves. Each handoff along that chain is a counterparty, and each one can fail, freeze your assets, delay their return or reuse them for its own purposes, and counterparty risk is really the sum of those links. The way to reduce it is to know every party in your chain, to understand what each one is allowed to do with your assets, and to shorten the chain wherever you can.
A digital dollar with a failed lender at the end of its chain
On Friday 10 March 2023, Circle disclosed that $3.3 billion of the reserves backing its USDC stablecoin, about 8% of the total, was held at Silicon Valley Bank, which had failed that morning. Over the following day USDC fell below 87 cents, even though Circle itself was solvent and the remaining reserves were largely in Treasuries. The price recovered only after US authorities announced on 12 March that SVB’s customers would be protected in full.
A holder of USDC had done nothing wrong and held what is designed to be one of the most conservative assets in onchain finance. Their loss, briefly, came from three links down the chain, at an institution most of them had never heard of, which is handoff risk in its simplest form.
When the safest fund broke the buck
Money market funds are where careful people keep their cash, and for decades they were treated as if a share would always be worth exactly $1. In September 2008 the Reserve Primary Fund, one of the oldest funds of its kind, held commercial paper issued by Lehman Brothers. When Lehman collapsed, the fund’s share value fell below $1 and it suspended redemptions, which triggered a run across the industry that ended only when the US Treasury stepped in with a temporary backstop.
The fund’s holders weren’t exposed to Lehman by choice. They were exposed because the fund they trusted had handed part of their cash to Lehman. Regulators have since tightened the rules several times, most recently in 2023, when the SEC removed the ability of money market funds to suspend redemptions and raised the share of assets that must be available within a day or a week to 25% and 50% respectively. Those changes reduce the risk without removing the chain.
When the counterparty reuses what it holds
Some handoffs fail because a counterparty goes bust, while others fail because a counterparty has been using your assets as if they were its own. In financial language this is called rehypothecation, and in some arrangements it’s entirely legal and disclosed. Prime brokers routinely reuse clients’ collateral to fund their own activities, and clients of Lehman Brothers’ London prime brokerage found in 2008 that assets they believed were theirs had been reused and were caught up in the bankruptcy for years.
When the reuse isn’t properly disclosed, it becomes something else entirely. In 2011 the broker MF Global collapsed with a shortfall of more than $1 billion in client funds that should have been kept separate. In 2022 FTX collapsed after customer assets were found to have been used by its affiliated trading firm, leaving billions of dollars missing. In each case, customers held a claim on a counterparty rather than an asset, and discovered the difference at the worst possible moment.
The Binance hack: a handoff that held, and the power it revealed
The theft of about $6.3 billion from Binance’s hot wallets on 29 October 2026 shows two sides of handoff risk at once. Customers who kept assets on the exchange had handed them to Binance, and when Binance’s hot wallet signing infrastructure was compromised, their assets were the ones that left. They’re being made whole because Binance has said it will cover the loss from its own funds, which is a decision by a well-capitalised counterparty rather than a protection built into the arrangement.
The same event showed how much power sits elsewhere in the chain. Within about an hour, Tether had frozen roughly $1.77 billion of the stolen USDT and Circle around $825 million of USDC. That helped recover stolen funds, and it’s also a reminder that the issuer of a digital dollar can freeze it, which makes the issuer a counterparty in every chain that uses its token. We look at the structural side of the hack in Cold, warm and hot.
Shorter chains are being built
The most useful response to handoff risk isn’t to avoid every counterparty, which is impossible, but to reduce how many there are and to limit what each can do. Off-exchange settlement is a good example of this, and since November 2025 Binance has accepted BlackRock’s tokenised money market fund as collateral for institutional trading, and since February 2026 it has accepted shares in Franklin Templeton’s tokenised fund, which are held by the custodian Ceffu while the exchange is shown a mirrored balance. The assets don’t move to the exchange, so a failure there doesn’t automatically reach them, and the fund’s return continues to go to its owner rather than to a stablecoin issuer.
Arrangements like this don’t eliminate counterparty risk, because the custodian and the fund remain links in the chain. What they do is remove the link that has historically been the weakest, which is the trading venue, and make the remaining links easier to see.
How to map your own chain
The exercise is simple, though few people ever do it. For each position, write down every party between you and the underlying asset: the platform, the custodian, the venue, the fund, the issuer and wherever their reserves sit. Then ask four questions about each one: whether they can move your assets or only hold or trade them, whether they can reuse or lend your assets and whether you’d know if they did, whether they can freeze or delay your access, and whether, if they failed tomorrow, your assets would be kept separate from theirs or you’d simply become one of their creditors.
The answers usually show that most of the risk is concentrated in one or two links, often the ones nobody thought to ask about.
How MakeBanc keeps the chain short
MakeBanc is designed to keep the chain between you and your assets as short and as visible as possible. Your assets sit with an institutional custodian in a vault that you sign for. The independent manager you choose can trade but can never move them, which also means they can’t be quietly lent out or reused, and MakeBanc never holds the keys. You can check the custody yourself on a public ledger at any time, and every party who is paid in the arrangement is shown before you commit.
MakeBanc doesn’t remove counterparty risk, because nothing can, but what it does is make each link in the chain visible, so the decisions about which risks to accept stay with you.
Frequently asked questions
What is counterparty risk? Counterparty risk is the risk that someone you depend on to hold, trade or return your assets fails, freezes them, delays them or reuses them. Most capital passes through several counterparties, such as platforms, custodians, exchanges, funds and stablecoin issuers, and each one adds risk.
What is rehypothecation? Rehypothecation is when a firm holding your assets as collateral reuses them for its own purposes, for example to fund its own borrowing. It’s common and disclosed in some prime brokerage arrangements, but when assets are reused without proper disclosure, as at MF Global in 2011 and FTX in 2022, customers can find they hold a claim rather than an asset.
Why did USDC lose its peg in March 2023? Because $3.3 billion of the reserves backing USDC, about 8%, were held at Silicon Valley Bank when it failed. USDC fell below 87 cents before recovering after US authorities said SVB’s customers would be protected in full.
How can I reduce counterparty risk? List every party between you and each asset, check whether each can move, reuse or freeze your assets and whether your assets would be kept separate if it failed, and favour structures with fewer links, such as independent custody with off-exchange settlement.
Sources
- CNBC, Stablecoin USDC breaks dollar peg after firm reveals it has $3.3 billion in SVB exposure, 11 March 2023
- Axios, Circle scrambles amid SVB fallout as USDC loses 1:1 peg, 11 March 2023
- Wikipedia, Reserve Primary Fund
- Harvard Law School Forum on Corporate Governance, The SEC’s money market fund reforms, August 2023
- Wikipedia, MF Global
- Wikipedia, Bankruptcy of Lehman Brothers
- Wikipedia, Bankruptcy of FTX
- TRM Labs, North Korea steals USD 6.36 billion from Binance, October 2026
- Wikipedia, 2026 Binance hack
- Cointelegraph, Binance accepts BlackRock’s BUIDL as off-exchange collateral, November 2025
- Franklin Templeton, Franklin Templeton and Binance off-exchange collateral program, 2026
MakeBanc is a technology platform that connects investors with independent asset managers. MakeBanc does not provide investment advice, custody services or banking services. Firms and products named here are drawn from public reporting. No structure removes counterparty risk entirely.