- Binance has devised a way to bypass counterparty risk after FTX failure caused FUD among crypto traders.
- The exchange will let select professional customers keep their collateral funds at a bank instead of on crypto platforms.
- Money held at the bank would be collateral for margin trading.
- Talks are already underway with institutional clients regarding the prospective plan.
Binance exchange has devised what could very well be the solution to counterparty risks associated with cryptocurrency trading. Based on a recent report, the world’s largest exchange by trading volume is considering a future where users can keep their trading collateral in banks instead of on crypto exchanges.
Binance to solve the FTX-induced FUD
Binance has found a way to correct the FTX-induced Fear Uncertainty and Doubt (FUD) concerning counterparty risks. In laymen terms, counterparty risk is “the measure of how likely one of the parties involved in a transaction is to default on their end of the bargain and how huge the damage is if they do.”
For context, the collapse of Sam Bankman-Fried’s crypto empire, FTX exchange, is among the most horrifying incidents ever witnessed in the cryptosphere, especially considering the individual clients and entities exposed to the now-defunct platform. The case is a clear example of the risks of taking part in the crypto playing field, highlighting the consequences of ignoring counterparty risks in the industry.
Binance users to store collateral funds in banks
In a recent report, Binance exchange has revealed a strategy to reassure users of the safety of their funds as they trade on the platform. Reportedly, the exchange will let select professional customers keep their trading collateral funds with a bank instead of storing them on cryptocurrency platforms.
Sources close to the matter have revealed that Binance is already discussing the plan with several institutional clients. If implemented, these clients would be able to use bank deposits as collateral for margin trading.
Based on the report, one of the possible approaches would be to lock clients’ funds at a bank via a tri-party agreement. With the cash safe in the bank, the exchange can then lend the customer stablecoins to serve as collateral for margin trading in spot and derivatives markets. The collateral funds deposited in banks could be invested in money market funds, enabling the client to accrue interest and clear the expense of borrowing crypto from Binance exchange.
Binance to target select banks
As expected, the strategy would also require signing off from the banks. Accordingly, two banks have been mentioned in deliberations about the project- Bank Frick in Europe and FlowBank. Nevertheless, details about a potential partnership remain confidential, with Binance saying that it is yet to finalize the plan, saying:
The arrangement is still subject to modification.
The development comes amid a turbulent time in crypto when exchanges face much pressure from clients, the government, and regulators to guarantee customer safety on the off chance that an unexpected catastrophe occurs, such as the dramatic collapse of FTX in November 2022. Notably, the incident resulted in significant permanent losses for institutional and retail traders, and the effects continue to stain the market today.
CEO Changpeng Zhao on the state of Binance
Binance CEO Changpeng Zhao attended an interview recently, detailing the state of the leading crypto exchange. As part of his revelation, CZ said that the exchange had considered buying a bank and customizing it to become crypto-friendly. However, they decided to abandon the idea citing stringent regulations, excessive risks, and the fact that expected profits would be underwhelming. Citing the Binance executive:
Banks are not cheap. Banks are very expensive for very little business revenue. […] The amount of capital required is quite high, and the regulatory approval for buying a bank is the same or more as setting up a new bank, which is very onerous. If the banking regulators say, ‘Look, you can’t work with crypto,’ then they can take your license away if you do. So buying a bank does not prevent regulators from telling you, “No, you can’t touch crypto.” Even then, we would need corresponding banks all over the world.
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