Governance & Risk
The Hidden Conflicts of Interest Reshaping Digital Asset Risk
As digital asset firms expand across multiple service lines, conflicts of interest are multiplying quietly and at scale. Investors, counterparties, and fund managers need to look beyond the headline offering and examine what these firms are actually doing across every function they operate.
By CV5 Capital | April 2026
A New Kind of Risk Is Being Underpriced
The digital asset industry has matured rapidly, and with that maturation has come a structural shift in how firms operate. Where early crypto businesses tended to occupy a single, clearly defined role, today's leading digital asset firms operate across an expanding array of business lines simultaneously. They provide liquidity, run proprietary strategies, advise on token economics, manage DeFi treasury allocations, offer prime brokerage services, and in some cases hold custody of client assets, all within the same legal entity or a tightly affiliated group structure.
For many of these firms, the multifunction model is presented as a competitive advantage. Clients are offered a seamless, integrated experience, and service providers market the efficiency of dealing with a single counterparty across multiple needs. From the outside, this convergence appears to reflect sophistication and scale. From the inside, it can reflect something far more problematic: a web of conflicts of interest that are rarely disclosed with the granularity that sophisticated allocators and counterparties would require in any other institutional context.
This article sets out why those conflicts matter, where they are most likely to surface, and what investors, fund managers, and institutional counterparties should be asking before they engage.
What Conflicts of Interest Actually Look Like in Practice
A conflict of interest arises whenever a firm has an incentive to act in a manner that serves its own commercial interests at the expense of the client, counterparty, or investor it is supposed to be serving. In traditional financial services, regulatory frameworks have spent decades codifying how these conflicts must be identified, disclosed, managed, and in many cases avoided altogether. Digital asset markets have largely developed outside those frameworks. The result is a sector where conflicts that would trigger mandatory disclosure or outright prohibition in a regulated fund or broker context are instead bundled into business models and presented as innovation.
Consider a firm that offers institutional market making alongside the management of discretionary strategies through separately managed accounts. In that structure, the firm is simultaneously providing liquidity to the market and running directional positions on behalf of its managed account clients. The trading desk executing client orders has direct insight into the size, timing, and direction of those positions. The information asymmetry this creates is obvious. Whether it is exploited intentionally or whether the incentive structures simply produce suboptimal execution for clients, the conflict is structural and material.
Or consider a firm that operates DeFi yield vaults open to retail or institutional depositors while simultaneously offering token listing advisory services to protocols whose tokens are included in those vaults. The advisory relationship generates fees from the protocol. The vault generates performance fees from depositors. The incentive to list tokens from fee-paying advisory clients rather than purely on merit is direct, and in most cases entirely undisclosed to vault depositors. The depositor's capital is put to work in an ecosystem that the firm itself has been paid to shape.
Other patterns are equally common. Prime brokerage operations that maintain their own proprietary trading desks create conflicts around order flow and execution quality. OTC desks affiliated with custody operations create conflicts around asset valuation and settlement. Staking service providers that also operate validator infrastructure have misaligned incentives around validator selection and slashing risk management. Individually, any one of these structures might be manageable with proper disclosure and governance. Collectively, in a firm operating across five or six such business lines simultaneously, the risk surface becomes very large and very opaque.
The Geography Problem: Multiple Offices, Minimal Scrutiny
What makes the conflict risk particularly acute in digital assets is not just the number of service lines these firms operate. It is the jurisdictional fragmentation through which they operate them. A firm might hold a licence in one jurisdiction for its fund management activities, operate its market making desk through an entity in a second jurisdiction with lighter-touch regulation, and run its DeFi treasury operations through a foundation structure in a third jurisdiction that sits entirely outside conventional financial regulation. Each entity may be technically compliant with the rules applicable to it. But the conflicts between them, and the information flows that connect them, may face no oversight at all.
This structure is not accidental. Regulatory arbitrage is a well-understood feature of the digital asset industry. But it is increasingly being used not just to minimise compliance cost, but to minimise the scrutiny applied to activities that, if conducted within a single regulated entity, would require explicit conflict management frameworks, internal controls, and disclosure to clients.
The practical result is that counterparties engaging with one arm of a multifunctional digital asset firm are often entirely unaware of what the other arms are doing, who they are doing it for, and how those activities interact with the service being provided to that counterparty. Most due diligence processes in the industry have not yet caught up with the sophistication of these structures, and that gap carries real financial risk.
"The conflict risk in digital asset markets has not diminished. It has been repackaged. The firms now operating these structures are often larger, more institutionally presented, and more credible in appearance than their predecessors."
Why This Matters More Than It Did Three Years Ago
The events of 2022 and 2023 provided the clearest possible illustration of how unmanaged conflicts of interest in digital asset firms can destroy value at speed. The collapse of a prominent exchange and affiliated trading operation was, at its core, a conflict of interest story. A firm that operated an exchange, a market maker, a venture fund, and a lending desk simultaneously, with shared capital pools and opaque intercompany flows, created the conditions under which client assets were put at risk through mechanisms that clients did not understand and had not consented to.
The instinct among many market participants after 2022 was that the industry had learned its lesson and that the most egregious multifunction structures had been dismantled. To some extent that is true. But the underlying commercial logic that drives firms to expand across service lines has not changed. The revenue potential of offering multiple services to the same client or counterparty remains compelling. The regulatory oversight that would force genuine conflict management in most of those service lines remains patchy across most jurisdictions.
The difference today is that the firms now operating these structures are often larger, more institutionally presented, and more credible in appearance than their predecessors. A polished institutional presentation is not evidence of institutional standards of conduct. Investors and counterparties who assume otherwise are taking a risk they may not have priced.
What Allocators and Counterparties Should Actually Be Asking
The standard institutional due diligence framework for digital asset managers has focused heavily on custody arrangements, valuation methodology, and operational infrastructure. Those remain critical areas. But conflict of interest analysis needs to sit alongside them as a first-order issue, not an afterthought. The questions that matter most are not the ones a firm is most likely to address proactively in its marketing materials. They require specific, targeted inquiry.
First, ask for a complete map of every business line and revenue stream operated by the firm and its affiliates, including entities that may not share the same brand or legal name. A firm that cannot or will not provide this information has already answered a significant question.
Second, ask how information is controlled between those business lines. What are the documented information barrier arrangements? Who has oversight of those controls and has that oversight ever been independently tested? In digital asset firms where the same small team operates across multiple functions, the existence of a policy document does not mean effective separation exists in practice.
Third, ask about compensation structures. If a market making desk is compensated partly on spread and partly on the performance of affiliated managed accounts, the conflict is embedded in the incentive framework rather than resolved by it. Understanding how people are actually paid across a multifunctional organisation reveals far more about real conflict risk than reading the disclosed conflicts section of an offering document.
Fourth, examine advisory relationships closely. A firm advising a protocol on token economics or exchange listing strategy while simultaneously making markets in that token or investing in it through client vehicles has multiple overlapping interests that require explicit disclosure and management. These arrangements are common. They are rarely disclosed with adequate specificity.
Fifth, and most importantly, look at what the firm actually does across all of its offices, entities, and affiliates, rather than focusing only on the service being provided to you. The risk in multifunctional firms is systemic. Focusing exclusively on the specific mandate or counterparty arrangement in isolation misses the structural vulnerabilities that surround it.
The Case for Structural Separation
The answer to the conflicts of interest problem in digital asset markets is not complexity management. It is structural clarity. Firms genuinely committed to serving institutional clients and counterparties without material conflicts need to make deliberate choices about what they will and will not do. A regulated fund platform that also operates a proprietary trading desk is not providing independent fund governance. A custody provider affiliated with a market making operation is not providing neutral asset safeguarding. A DeFi yield manager with advisory fee income from protocol clients is not making purely objective capital allocation decisions.
This is not to suggest that every multifunction firm is acting improperly. Some firms manage their conflicts with genuine rigour and disclose them with appropriate transparency. But the institutional standard should be to verify rather than assume, and the current practice of most due diligence processes in digital assets falls well short of that standard.
At CV5 Capital, our approach to this challenge is clear. We operate as a CIMA regulated fund formation and governance platform. Our function is to provide independent infrastructure, governance, and compliance support to fund managers launching and operating under the CV5 Digital SPC and CV5 SPC umbrella structures. We do not trade. We do not run proprietary strategies. We do not provide market making, token advisory, or DeFi yield management services. Our revenue model is aligned with the institutional integrity of the platform, not with the performance of strategies that could create competing incentives. That structural discipline is not a constraint on what we can offer. It is the foundation of the institutional trust that a regulated platform requires to operate credibly over the long term.
Conclusion: Look at What Firms Actually Do
The digital asset industry is entering a period of deeper institutional engagement. Regulatory frameworks in multiple jurisdictions are developing, allocator interest is growing, and the infrastructure supporting institutional participation is becoming more robust. That is a genuinely positive development for the asset class as a whole.
But the institutionalisation of digital assets will only be credible if the firms operating within it are held to institutional standards of conflict management and disclosure. The multifunction model that characterises much of the current industry is not inherently disqualifying. But it demands a level of scrutiny that has not yet become standard practice among allocators and counterparties.
Investors, counterparties, and fund managers should not rely on headline positioning or regulatory licences alone. They should look at what a firm is actually doing across every service line, every entity, and every market in which it participates. Where multiple lines of business serve the same market simultaneously, the conflict of interest risk is real, and the cost of ignoring it can be significant.
The firms that will define institutional digital asset infrastructure over the next decade will be those that chose structural integrity over short-term revenue diversification. That distinction is already visible, if you know where to look.
This article is published for informational purposes only and does not constitute legal, regulatory, or investment advice. Readers should obtain independent professional advice in relation to their specific circumstances. CV5 Capital is registered with the Cayman Islands Monetary Authority (CIMA Registration No. 1990085).
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