- 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.
Also Read: Binance CZ dismisses FUD, predicts next big crypto trend in a new interview
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.
Also Read: Will Binance CEO Changpeng “CZ” Zhao be the next Elon Musk for meme coins?
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
US presidential election outcome could shape the future of crypto
US citizens will go to the polls to elect a new president on November 5, and their choice could be key for the future of the crypto industry and thus the price outlook for Bitcoin (BTC).
Bitcoin Price Forecast: BTC recovers as Donald Trump takes lead on polls
Bitcoin (BTC) slightly recovered to around $68,800 on Tuesday, following a shift in the United States presidential race that saw former President Donald Trump regain the lead, after US spot Bitcoin ETFs experienced an outflow of over $540 million on Monday.
Crypto markets brace for volatility in tight race between Trump and Harris
The US presidential election is one of the most significant events in the world. Due to the influence of the country’s political decisions, policies, and economic approaches, it can significantly impact crypto and global markets.
Trump-inspired memecoin MAGA shows bullish on-chain metrics ahead of US elections
MAGA (TRUMP) trades slightly down to around $3.4 on Tuesday after rallying more than 20% since Sunday. The former President Donald Trump-based memecoin is poised for further gains as daily active addresses and network growth metrics rise, signaling increased network usage and adoption
Bitcoin: New all-time high at $78,900 looks feasible
Bitcoin price declines over 2% this week, but the bounce from a key technical level on the weekly chart signals chances of hitting a new all-time high in the short term. US spot Bitcoin ETFs posted $596 million in inflows until Thursday despite the increased profit-taking activity.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.