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FTX Collapse Prompts Binance to Offer Bank Custody to Big Clients

dailycoin.com 31 May 2023 07:30, UTC

Binance is exploring the possibility of letting some of its institutional clients keep their trading collateral in banks.
The aim of the move is to reduce counterparty risk.
Clients are jittery about crypto exchange custody after the FTX collapse.

As ripples of the FTX collapse still reverberate across the market, concerns about exchange custody remain elevated. Binance, the world’s largest exchange, is considering a plan to reduce the risk of an FTX-like collapse.

On Tuesday, May 31, Bloomberg reported that Binance was in talks with institutional clients about a potential change in collateral requirements.

Binance to Partner with Banks to Reduce Risk of FTX Happening Again

The new policy would allow institutional investors to use bank deposits as collateral for margin trading in spot and derivatives markets. To enable such an arrangement, Binance would partner with traditional banks. Swiss-based FlowBank and Liechtenstein-based Bank Frick are potential partners, as per reports.

Under one proposed structure, clients’ cash would be locked up in a tri-party agreement at the bank. Meanwhile, Binance would provide the clients stablecoins as collateral for margin trading.

These bank-held funds could then be invested in money-market funds, potentially earning interest to help offset the costs of borrowing crypto from Binance.

Binance Plan Comes After Investors Lost Billions in FTX Collapse

So far, institutional investors that wanted to trade crypto have had to exchange fiat currency. Afterward, they had to keep the crypto in a centralized exchange, effectively surrendering their custody.

As FTX clients found out, that arrangement was risky. Specifically, giving a crypto exchange custody over their funds exposes clients to counterparty risk. This means that clients are left without access to their funds if an exchange goes under. By letting clients keep collateral in banks, Binance would substantially lessen counterparty risk for their clients still worried about FTX.

On the Flipside

Binance’s proposal is still in discussion; there are no guarantees of it materializing.
The initiative only applies to institutional clients, not retail investors. Small investors will still face counter-party risk when storing their funds on Binance.

Why This Matters

The move by Binance may prompt other exchanges to offer the same service, reducing the risks to investors. As risks drop, major investors will likely be more willing to jump back into crypto, positively affecting the market.