In a recent report, Binance, the world’s largest cryptocurrency exchange, is exploring the possibility of allowing some traders to store their collateral in banks. This innovative approach could significantly reduce counterparty risk and enhance the security of trading operations.
Binance Plans To Reduce Counterparty Risks
Binance has always been at the forefront of innovation in the crypto world, and this latest move is no exception. The exchange is in discussions with some of its professional clients about a new setup that would allow them to use bank deposits as collateral for margin trading in spot and derivatives markets, as per four sources cited by Bloomberg on Tuesday.
This would be a significant departure from the current practice, where traders are required to store their collateral on the crypto platform.
This comes after the FTX failure, which has prompted crypto funds to advocate for changes in how collateral is managed. By enabling traders to use bank deposits as collateral, Binance aims to reduce counterparty risk and enhance the security of trading operations
Among the individuals Bloomberg consulted, two named Swiss-based FlowBank and Liechtenstein-based Bank Frick as possible intermediaries in this proposed setup.
“Under one version of the proposal Binance has discussed, clients’ cash at the bank would be locked up through a tri-party agreement while the exchange lends them stablecoins to serve as collateral for margin trading. The cash kept with the bank could then be invested in money-market funds to earn interest, helping to compensate for the cost of borrowing crypto from Binance, they said.”
Binance Aims To Bridge The Gap Between Traditional Finance And Crypto
If implemented, this move could have far-reaching implications for the crypto market. It could set a new standard for other exchanges to follow, potentially leading to a broader shift in how collateral is managed in the crypto trading world. Moreover, it could also help to bridge the gap between traditional finance and the crypto world, making it easier for institutional investors to enter the crypto market.
Amidst increased scrutiny from US regulators, Binance, the world’s largest cryptocurrency exchange, is exploring a new approach to protect its clients. Crypto exchanges, including Binance, have been under the regulatory microscope for their practice of amalgamating multiple services, such as custody, brokerage, and lending.
When crypto intermediaries, like Binance, mix together different services such as custody, brokerage, and lending, it can lead to conflicts of interest and potential risks for investors.
This is something that the Securities and Exchange Commission (SEC) doesn’t allow in any other financial marketplace. SEC Chair Gary Gensler emphasized this point during his recent testimony before the US House Financial Services Committee.
In light of this, Binance is considering a new approach. The crypto exchange is thinking about letting traders use bank deposits as collateral for margin trading. This move is seen as a proactive step to reduce these potential conflicts and risks, and ultimately, to better protect their investors.