The Five Questions Every Family Office Should Ask Before Trading Crypto Derivatives

By Gideon Hyams, Chairman and co-founder, STS Digital

In the last piece (Why a 3% crypto allocation is not enough) I argued that a 3 percent spot allocation is not a strategy, and that sophisticated family offices are using options or structured products to get asymmetric crypto exposure with defined downside. The response told me something. The structures were not the sticking point. The counterparty was.

Almost every family office I have spoken to since has asked some version of the same question: how do we know who we are trading with? It is the right question. In crypto, the product can be perfect and the counterparty can still sink you. FTX was not a bad product - it was actually a great product. It was a bad counterparty.

So here is the diligence framework. Five questions. If a counterparty cannot answer all five clearly and in writing, you are not looking at an institutional counterparty, regardless of how good the pricing looks on the screen.

1. Who regulates you, and what does the licence actually permit?

“Regulated” is the most abused word in crypto. A firm can hold a registration in one jurisdiction for one narrow activity and imply it covers everything they do. It usually does not.

The question is not whether a firm is regulated. It is which regulator, under which framework, for which activities. A payments licence does not authorise principal derivatives dealing. A registration as a money services business is not a securities or derivatives permission. Ask for the specific licence, the issuing authority, and the activities it covers. Then check it against what you are actually about to do with them.

The firms worth trading with are regulated by an authority with a real derivatives framework and real enforcement teeth. They will tell you exactly what their licence permits and what it does not. The firms to avoid will give you a logo and a vague sentence.

2. Where are my assets held, is the segregation real, and how often is it reconciled?

This is the question FTX should have taught everyone to ask, and most still do not ask it properly.

The line that actually protects you is the one between client assets and the firm’s own assets. That boundary has to be real and operational, not just a sentence in the terms. Ask whether client assets are held separately from the firm’s proprietary balance sheet, whether they are ever used in the firm’s own trading, and how that separation is enforced day to day. The answer on proprietary use should be a flat no, and the firm should be able to show you how that no holds in practice.

Within the client pool, some pooling is normal. Most institutional counterparties hold client assets in an omnibus structure, co-mingled across clients but ring-fenced from the firm, using MPC custody from a provider like Fireblocks or Fordefi. That is fine, provided it is reconciled and provided full individual segregation is available to clients who want it. What matters is not whether your coins sit in their own dedicated wallet, it is whether the firm can always account for exactly what it owes every client and exactly where those assets are.

Which is the real test: how often does the firm reconcile what it owes clients against what it actually holds? The right answer is daily. A serious counterparty produces a daily reconciliation of total client liabilities, meaning the market value of every client account, against where the assets are physically held, whether on an exchange in labelled client accounts, in omnibus custody, or in fully segregated custody. If a firm cannot tell you on any given morning that its client assets match its client liabilities, it does not really know whose money is where. Ask them to walk you through how that reconciliation works. The firms that have built it will be glad to show you.

3. Can you show me three years of audited financials, and who is the auditor?

Capital is what stands behind a principal counterparty when a trade goes against them. If you are trading derivatives with a firm acting as principal, their balance sheet is your counterparty risk. You need to see it.

Ask for audited financials. Not management accounts, not a screenshot of assets under custody, audited financials, signed by a recognised firm. Ask how many consecutive years they have been audited. A firm in its first year of an audit is in a different category to one with three or four years of clean audited history. The track record itself is the signal, because it shows the firm has been operating at institutional standard for long enough to have been examined repeatedly and survived the examination.

Then ask who the auditor is. A top-tier or established mid-tier audit firm has a reputation to protect and will not sign off on accounts they cannot stand behind. An auditor nobody has heard of is not much of a check.

4. How much of my exposure sits on an exchange, and how is that exposure managed?

This is where naive diligence and real diligence diverge.

The naive question is “are any of my assets on an exchange?” and the naive ideal is zero. But a counterparty holding every client asset off-exchange cannot trade for you around the clock. To execute spot, and to delta hedge options positions in real time, some assets have to be deployable on exchange. A firm that holds everything off-exchange is either unable to give you genuine 24/7 liquidity, or is funding that liquidity from its own balance sheet, which does not scale and which you end up paying for in the price. Some exchange exposure is simply the cost of a desk that can actually trade.

So the real question is not whether assets sit on exchanges, it is how that exposure is controlled. Ask three things. First, are client assets on exchange held in labelled client accounts, distinct from the firm’s own positions, rather than swept into the firm’s trading wallet? Second, how concentrated is the exposure? A serious firm spreads client assets across multiple venues with hard limits per exchange, tiered by the credit quality of each venue, so that no single exchange failure is catastrophic. Third, where exposure to a particular venue is large, can the firm custody the assets off-exchange and still trade against them? Holding collateral in a segregated vault while executing on an exchange limits credit risk to that exchange without giving up the ability to trade.

And for clients who want zero exchange exposure, ask whether full off-exchange custody is available, for example through a provider like BitGo, where assets stay off-exchange throughout and cannot be moved to a venue. It is the most conservative option. It is also more balance-sheet intensive, so expect it to come with a trade-off in pricing or capacity. That trade-off is the honest answer, and a counterparty that explains it to you straight is one that understands its own risk.

5. How do you price me, and how do you manage the risk you take from me?

The first four questions are about safety. This one is about whether you are being treated fairly, and it is the one almost nobody asks.

When a principal counterparty quotes you a structured product or an option, they are pricing it off their own volatility surface and their own risk appetite. You are entitled to understand, at least in principle, how that price is derived. A serious counterparty can explain their pricing methodology without giving away their edge. They can tell you how they hedge the risk they take from your trade, how they manage their book, and why their quote is what it is. A firm that treats every pricing question as a black box is either not sophisticated enough to explain it or not confident the price is fair.

This matters more as your tickets get larger. On a small trade, a wide price costs you a little. On a structured note sized to a real allocation, the difference between a fair price and a lazy one compounds into serious money over the life of the position. Ask the question. The quality of the answer tells you whether you are dealing with a desk that prices on a model or one that prices on a hunch.

The pattern behind the five

Notice what these five questions have in common. None of them are about crypto. They are the same questions a family office would ask of any prime broker, any structured products desk, any derivatives counterparty in equities or FX. Regulation, asset safety, capital, settlement, fair pricing. The discipline is not new. It has been standard in traditional finance for decades.

The only thing that has changed is that the crypto industry has finally matured to the point where good counterparties can answer all five, in writing, without flinching. The firms that can are the ones building the institutional market. The firms that cannot are the ones you read about later.

Run the five questions on anyone who wants your derivatives flow. The good counterparties will respect you for asking. The rest will tell you everything you need to know by how they answer.

If you want to see how we answer them, we should talk.

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Gideon Hyams is CEO and co-founder of STS Digital, a BMA-regulated structured products and derivatives firm specialized in digital assets working with institutional clients across five offices globally. STS has traded over $5 billion in cumulative option notional and is audited by BDO.  |  BMA-regulated  ·  Fireblocks MPC  ·  BitGo OES  ·  Shoulder to shoulder with our clients