-
- Binance, the world’s largest cryptocurrency exchange, is reportedly in discussions to allow select institutional clients to keep their trading collateral in a bank to minimize counterparty risk.
- Among the potential intermediaries for this service are Swiss-based FlowBank and Liechtenstein-based Bank Frick.
Binance Contemplates Over Risk Mitigation Approach
Binance, the globally recognized cryptocurrency exchange, has had its share of hurdles over the year. With legal obstacles and regulatory challenges aside, the platform has achieved significant growth, reinforcing its position in the crypto industry. Binance is currently mulling over an idea that could allow certain institutional clients to hold their trading collateral in a bank rather than on the exchange, thereby reducing counterparty risk.
According to a Bloomberg report, Binance has been considering a new arrangement with its institutional customers. This setup would permit them to use bank deposits as collateral for spot and derivatives margin trading. The Swiss-based FlowBank and Liechtenstein-based Bank Frick have emerged as potential intermediaries for this service, though discussions are confidential and outcomes subject to change.
This move comes in response to the heightened concerns among institutional crypto traders following FTX’s sudden collapse last year. Cryptocurrency exchanges play numerous roles – from facilitating trades and custodizing assets to settling transactions and offering credit. These multifaceted responsibilities can escalate the risk of significant fallout should an exchange fail.
Potential Bank Partnership in the Horizon for Binance
In the proposed arrangement by Binance, client’s cash stored at the bank would be secured through a tri-party agreement. Meanwhile, the exchange would provide stablecoins as collateral for margin trading. Bank deposits made by clients could be invested in money-market funds, potentially generating interest that could counterbalance the cost of borrowing crypto from Binance. However, this setup is not yet finalized and might undergo further alterations.
Securing custody and diversification of client holdings have recently become focal points in regulatory proposals across Asia and Europe. Furthermore, industry behemoths like Nasdaq Inc., Bank of New York Mellon Corp., and Fidelity Investments are either providing or developing crypto custody solutions for institutional investors.
Binance has seen a dip in its crypto market share in recent months, primarily due to the discontinuation of its zero-fee promotion in March and the lawsuit from the Commodity Futures Trading Commission. Nevertheless, in the wake of the FTX incident, the exchange launched Ceffu, a custody solution enabling institutional clients to store their assets in a segregated cold wallet. As per a 2022 corporate filing, Changpeng Zhao, Binance’s CEO, fully owns the company managing Ceffu.