Binance Has A Master Plan To Manage Crypto Risk By Letting Traders Hold Collateral In Banks

The implosion of Sam Bankman-Fried’s FTX empire is easily one of the most gruesome incidents in the crypto industry’s history. The FTX case underscores the risks of participating in the cryptocurrency market. In particular, it brings to the forefront the prevalence of counterparty risk in crypto.

The world’s largest cryptocurrency exchange by trading volume, Binance, has come up with a potential solution to offset this risk, according to Bloomberg. Binance wants to let select professional customers keep their trading collateral funds at a bank rather than on crypto platforms.

Binance Looks To Eliminate Counterparty Risk

Binance could soon move forward with a strategy to allow some of its traders to store their collateral in banks, thus eliminating counterparty risk.

For those unaware, 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.

Anonymous sources familiar with the matter told Bloomberg that Binance has engaged in talks with some institutional clients regarding the prospective plan that would enable them to employ bank deposits as collateral for margin trading.

Per the news publication, one possible arrangement would involve locking clients’ cash at a bank through a tri-party agreement while the exchange lends the customers stablecoins that would then serve as collateral for margin trading in both spot and derivatives markets. These collateral funds deposited in banks could be invested in money market funds, allowing clients to accumulate interest and offset the expense of borrowing crypto assets from Binance.

Binance Explores Collaboration With Banks

Two banks — Europe-based Bank Frick and FlowBank — have been floated in conversations about the project, although details of any potential partnership remain confidential. Moreover, Binance is yet to finalize the plan, and the arrangement is still subject to modification. 

Nonetheless, the move comes as Binance and other crypto trading firms face immense pressure to guarantee safety in the event of unprecedented failure following the spectacular collapse of FTX last November, which brought about substantial permanent losses for institutional and retail traders.

In a recent interview, Binance CEO Changpeng Zhao revealed that the exchange had briefly considered purchasing a bank and making it crypto-friendly, but ultimately decided against it due to strict regulations, the risks involved, and underwhelming profit expectations. Zhao noted:

“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 doesn’t prevent regulators from telling you, “No, you can’t touch crypto.” Even then, we would need corresponding banks all over the world.”