In financial markets, confidentiality is crucial for maintaining fair trading practices. But the US$360bn+ per-day crypto spot and derivatives markets have exploded on specialist exchanges, with first movers willing to make some short-term privacy trade-offs to capture opportunities.

Institutional crypto and DeFi trading on crypto exchanges has driven new liquidity, revenue, and trading opportunities. But it has also shown us the risks of full transparency when trading on public permissionless blockchains, where other market participants can see your transactions and exploit privacy shortcomings. For example, using digital assets issued on public blockchains as collateral for initial or variation margin on exchanges can signal a trader’s intent, leading to front-running and unfair trading practices. 

The good news is that it doesn’t have to be this way. With digital asset and tokenization applications on the Canton Network, market participants can create and use diverse forms of tokenized collateral on exchanges with privacy. Market makers, exchanges, and crypto asset service providers can take full advantage of these marketplaces and emerging forms of tokenized collateral, without exposing trading strategies to other participants.

This level of privacy isn’t a future feature, it’s available now. It’s a core reason why the Canton Network already supports monthly UST repo volumes of over $1.5T and over $3.6T of tokenized real world assets (RWAs). Because of its privacy properties, tokenized, regulated RWAs on Canton-based solutions receive the same regulatory and capital treatment as the underlying asset: same risk, same regulation.

For crypto trading markets to continue to grow and attract institutional investors, the ability to trade without the fear of exposing collateral movements and ending up on the wrong side of a trade shouldn’t be a “nice to have;” rather, it’s a baseline capability that will give participants confidence to execute bigger trades and create deeper liquidity.

The privacy puzzle in crypto asset markets

In many ways crypto asset markets are replicating traditional markets with specialized issuers, custodians, exchanges, market makers, asset managers, data providers and payment rails. Tokenized asset issuers targeting institutions are focused on investor protections and security as part of the issuance process. But when these assets are traded or posted as collateral, a lack of privacy leaves a gaping hole in the puzzle.

Within decentralized marketplaces, miners pursuing Maximal Extractable Value (MEV) strategies have demonstrated innovative approaches to arbitrage. But total transparency also leads to undesirable front-running practices and the risk of significant losses for traders. 

Centralized crypto exchanges have the privacy problem, too. Transparency into collateral deposited and withdrawn signals a market makers’ intentions. Transaction details and trading accounts can be uncovered by anyone who knows how to dig into the underlying blockchain. Without the baseline privacy of traditional marketplaces, responsible adoption and increased liquidity of institutional-grade digital assets are likely to be limited.

In this sense, full transparency should be viewed as a bug, not a feature. It undermines the institutional adoption of tokenized real-world assets and creates an unnecessary barrier to liquidity and market depth.

Confidentiality breeds confidence

In traditional finance, market makers post collateral ahead of executing trades. Central Securities Depositories (CSDs) and intermediaries (e.g., clearinghouses) ensure collateral is held securely, operating under strict regulatory frameworks that emphasize participant privacy. The system is designed to ensure that only authorized parties can see sensitive details, like the timing or size of trades, which largely prevents practices like front-running. And for trades where collateral is exchanged bilaterally, the details are private to the participants. 

These privacy guarantees are a key reason why traditional markets remain stable, fair and safe for liquidity providers, exchanges and institutional investors.

What if collateral could be delivered with these same protections in the world of institutional crypto trading?

By extending similar properties to crypto markets, market makers can collateralize and execute trades without fear of their strategies being exposed. 

DeFi-like transactions with privacy: What institutional crypto can learn from DTCC and Euroclear

Recent projects on the Canton Network – including the tokenization of US Treasuries by the DTCC, and Eurobonds and gold by Euroclear and the World Gold Council –  demonstrated that tokenized assets can be used as highly mobile collateral, achieving the benefits of blockchain, along with levels of privacy associated with – and demanded by – participants in traditional markets. 

By mobilizing these and other real-world assets, some of the world’s most heavily regulated organizations showed that highly liquid tokenized instruments can be atomically transferred and used as collateral across regulated financial systems while preserving confidentiality. The Canton Network was designed to enable exactly these capabilities – atomic transactions across systems (i.e., the net new innovation of DeFi), with fine-grained privacy. 

Canton is a public, permissioned network where the real-time synchronization, transfer and settlement of assets across different participants is a reality. But unlike other public L1 blockchains, information is only shared between parties on a need-to-know basis. Canton’s architecture ensures that only those involved in transactions can see and validate them.

Diverse new forms of collateral emerging - with privacy baked-in

As tokenized money market funds and other yield bearing assets are increasingly used as high quality, yield-bearing collateral on digital asset exchanges, privacy promises to be a significant differentiator.

One example is Hashnote's US Yield Coin (USYC) which demonstrates how privacy can be easily added to the asset’s utility. By issuing USYC on Canton, Hashnote makes available a privacy-enabled yield-bearing asset that can be utilized as collateral on exchanges, without exposing sensitive trade information to competitors. 

Conclusion

Privacy is the key that unlocks the ability to combine the best of DeFi innovation, with the best practices of traditional markets. As the boundaries between traditional and decentralized finance continue to blur, TradFi's privacy protocols and practices are increasingly relevant to crypto asset markets. The Canton Network offers a common venue where crypto and TradFi markets can borrow the best from each other— decentralization, direct value transfer and settlement efficiency, combined with privacy and control.

For institutional investors, market makers and exchanges, privacy in collateral delivery can drive competitive advantage now. By implementing this simple but powerful capability, liquidity can be unlocked, enabling institutional-grade digital assets to move from side-show to main event in a new global economic network.

Interested in connecting to the Canton Network? Discover different ways to participate and how to get started here.