Binance is making efforts to reduce counterparty risk and improve safety.
The headache of dealing with inherent risks, particularly counterparty risk, in the crypto industry has intensified since the collapse of the FTX exchange.
When traders encounter counterparties who do not deliver the agreed-upon assets or funds or fail to fulfill their obligations, traders can face significant losses.
A Solution to Mitigate Counterparty Risk
To address this issue, Binance is considering allowing select professional customers to store their collateral funds in banks, as reported by Bloomberg.
By adopting this proactive approach, there is potential for a substantial reduction in counterparty risk, consequently augmenting the overall safety of cryptocurrency trading as other changes may follow suit.
Sooner or later, the leading crypto exchange will emerge as a frontrunner in addressing counterparty risk. Binance is reportedly considering working with banks to enable professional traders to keep their collateral in banks.
“Binance is discussing a proposal to let some of its institutional clients keep their trading collateral at a bank instead of with the crypto platform, a step that could help reduce counterparty risk,” Bloomberg highlighted.
By depositing collateral with a bank, traders would reduce their exposure to the risk of the other party defaulting on their obligations. This strategy presents an opportunity to enhance the safety and reliability of trading activities in the cryptocurrency market.
The Counterparty Question
Counterparty exposure is a long-term and serious risk typically involved in margin trading. Margin trading allows traders to borrow funds to trade large positions, and using bank deposits as collateral provides an added layer of security.
Binance’s solution offers several benefits to traders and the broader crypto market. It could reduce the risk of financial loss due to counterparty default, thus fortifying trust and confidence among traders. It also provides an alternative storage option that may appeal to institutional clients seeking more traditional custodial arrangements.
Additionally, adopting bank storage for collateral sets a positive precedent for risk management in the cryptocurrency industry, potentially attracting more participants and fostering increased market stability.
Specific details regarding Binance’s potential partnership have been kept under wraps. However, according to a source familiar with the matter, the exchange works on the new project with two financial institutions, Bank Frick and FlowBank.
The development comes when Binance and other cryptocurrency trading firms face significant pressure to ensure the safety of funds in the event of unforeseen failures.
The collapse of FTX last November resulted in substantial losses for institutional and retail traders, intensifying the need for enhanced safety measures.
Noteworthily, no concrete plan has been confirmed, and the arrangement remains subject to potential modifications.
Will Binance Buy a Bank?
Speculations have arisen in the cryptocurrency industry about Binance potentially acquiring a bank.
As the exchange aims to strengthen operations and navigate regulations, the idea of Binance buying a bank has generated curiosity and debate among industry observers.
Following the collapse of FTX, the failures of Silicon Valley Bank and Sivergate Bank, which were instrumental in bridging the crypto and banking sectors, raise concerns about the feasibility and implications of crypto-friendly banks.
Speaking with Bankless, Changpeng Zhao, the founder and CEO of Binance, disclosed that the exchange briefly weighed on acquiring a bank and transforming it into a crypto-friendly institution.
However, the decision was ultimately abandoned due to stringent regulations, associated risks, and less-than-impressive profit expectations.
Zhao explained that banks are expensive investments with relatively limited business revenue. Furthermore, the substantial capital requirements and rigorous regulatory approval processes involved in acquiring a bank were deemed burdensome.
Purchasing a bank, according to CZ, would not prevent banking regulators from prohibiting involvement in the crypto sector, potentially resulting in the revocation of licenses.
Zhao emphasized the importance of having corresponding banks worldwide to facilitate smooth operations.
While expressing concerns about banks’ risky business model, which didn’t fit Binance’s model, CZ said Binance might make small investments in a few banks.