How Does the Concept of “Settlement Risk” Apply to OTC Cryptocurrency Derivatives?

Settlement risk in OTC crypto derivatives arises from the time lag between trade execution and the final exchange of cash or assets. Due to the finality and speed of blockchain transactions, and the lack of a central clearing house in many OTC settings, one party may fail to deliver their side after the other has performed.

This is often mitigated through collateralization or using a trusted third-party settlement agent. The volatility of crypto assets exacerbates this risk.