How Does Physical Settlement of Bitcoin Futures Pose a Security Risk for an Exchange?

Physical settlement would require the exchange or clearinghouse to securely hold and manage large reserves of actual Bitcoin for delivery purposes. This makes them a prime target for cyberattacks and theft, similar to a centralized crypto wallet service.

The complexity of managing private keys, hot/cold storage, and the risk of regulatory seizure or loss of funds makes cash settlement a much safer option for the financial institution.