Crypto glossary
Counterparty risk
Counterparty risk is the chance that the other side of a deal, such as an exchange, lender, issuer or broker, fails to pay or return the assets it owes.
Whenever someone deposits coins on an exchange, lends them to a platform, holds a stablecoin or buys a derivative, they rely on another party to honour an obligation. If that party becomes insolvent, freezes withdrawals or commits fraud, the asset becomes a claim whose value depends on what can be recovered. The risk exists even when the underlying cryptocurrency keeps working perfectly.
Crypto learned this the hard way in 2022, when the collapse of Terra, Three Arrows Capital, Celsius, Voyager and FTX showed how much user money sat with counterparties that had lent, pledged or misused it. Institutions now ask for segregated custody, proof of reserves with liabilities, regulated custodians and collateral posted on-chain, and retail users increasingly withdraw to self-custody between trades.
Self-custody removes counterparty risk but adds operational risk: lost keys, phishing and mistakes. DeFi replaces company risk with smart contract and oracle risk rather than eliminating it, and stablecoins carry issuer and banking risk. Measuring exposure means asking who holds the asset and what happens if they disappear.
Example
A fund keeps its trading collateral on a single offshore exchange; when the exchange halts withdrawals, the fund's coins become an unsecured claim in a bankruptcy that takes years to resolve.