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FollowingImpact of mandatory pre-financing
Many over-the-counter cryptocurrency trading counters currently require customers to fully pre-finance transactions. For example, if a payment provider wants to convert 1 million euros to cryptocurrency or fiat, the same amount must be deposited into the OTC counter before the transaction takes place. This transfers the entire capital burden to the customer and locks up positions for the counter.
Mandatory full pre-financing locks in capital that could otherwise be used to support other operating needs. Before the transaction is settled, the pre-financing amount is deducted from the provider's account, making it impossible to use it for daily business operations, such as paying or covering operating expenses.
In practice, payment providers that handle daily cryptocurrency conversions have large amounts of funds that are constantly locked up at trading desks. As transaction volume and business activity grow, so does the share of funds idle in pre-financing, which only stops when operations stop. This arrangement is most costly for companies handling high-frequency trading because they continue to invest more capital, limiting their ability to expand further.
Margin based settlement as solution
Margin based settlement provides a different model. Instead of depositing the entire transaction amount, customers deposit a certain percentage of collateral while retaining the remaining funds for other purposes. Once the transaction is settled, the collateral will be returned to the customer, rather than pre-locking the entire transaction amount.
For example, in a 1 million euro cryptocurrency to fiat transaction, with a 30% mortgage requirement, the payment provider only needs to deposit 300,000 euros as a deposit and keep 700,000 euros for personal use. Transaction execution and size are not affected, but capital efficiency is significantly improved.
FinchTrade is a regulated virtual asset service provider headquartered in Switzerland that uses this margin based approach. The company aggregates liquidity from various locations and uses smart order routing to provide execution flexibility to institutional payment providers, e-money institutions and cryptocurrency exchanges.
Small Dictionary
VASP (Virtual Asset Service Provider) is a company that exchanges, transfers or securely keeps virtual assets such as cryptocurrency, and is usually subject to financial supervision.
Comparison of trading models: The 100% pre-financing model requires a prepayment of EUR 1, 000,000, and the customer has 0 euros left on the book, and the execution timing is at the time of transaction; the security-based model (30% mortgage) requires a prepayment of EUR 300,000, and the customer has 700,000 euros left on the book, and the execution timing is at the time of transaction.
Weighing broader costs
Counts often attract customers with competitive spreads, which is the visible difference between bid and sell prices. However, capital requirements-such as the need to advance financing transactions or the speed at which settlement funds are returned-remain less obvious and are sometimes not noticed until liquidity is tight.
The capital impact of daily pre-financing is negligible for occasional traders, but the negative impact can intensify for active payment providers. As the volume of business increases, so does the permanent occupation of capital, creating operational bottlenecks that often appear before the market reaches the limit of demand.
The margin based model aims to address these turning points for growing companies, as permanent capital lock-in for pre-financing may hinder expansion in a high-frequency trading environment.
About FinchTrade
FinchTrade is a Swiss-based over-the-counter cryptocurrency liquidity provider focusing on payment processors, electronic money institutions and exchange platforms. By providing cryptocurrency to fiat conversion, bulk payments and stablecoin settlement, it supports more than 100 institutional customers, providing margin based trading and aggregated liquidity solutions.
