Cryptocurrency exchange Binance is exploring a potential solution to reduce counterparty risk by allowing some of its institutional clients to store their trading collateral with a bank instead of on the cryptocurrency platform, according to Bloomberg.
Binance is discussing a proposal to let some customers keep their collateral for margin trading in a bank account, which could reduce counterparty risk https://t.co/IGnLqASBuA
— Bloomberg Crypto (@crypto) May 30, 2023
This measure responds to the demand of institutional traders of digital assets for greater security measures after the bankruptcy of FTX at the end of last year, which caused substantial losses for many users.
According to anonymous sources familiar with the matter, Binance has reportedly entered into discussions with select professional clients about a setup that would allow them to use bank deposits as collateral for margin trading in the spot and derivatives markets. Two potential intermediaries for this service, Switzerland-based FlowBank and Liechtenstein-based Bank Frick, were mentioned, though details of any possible partnership remain private.
Under the proposal, customer funds deposited with the bank would be secured through a three-way agreement, while Binance would provide stablecoins as collateral for margin trading. Funds deposited with the bank could be invested in money market funds, allowing clients to earn interest and offset the cost of borrowing cryptocurrency from Binance.
According to the anonymous sources, the proposed deal is still being discussed and is subject to possible modifications.
During an interview on the Bankless Podcast on May 29, Binance CEO Changpeng Zhao (CZ) addressed Binance’s idea of buying a bank and making it pro-crypto. Zhao acknowledged that Binance had considered the idea, but explained the complexities involved. He noted that a bank acquisition would be limited to the jurisdiction of that particular country and would still require compliance with local banking regulators. He explained it this way:
“The reality is much more complex than the concept. You buy a bank, it only works in one country, and you still have to deal with banking regulators in that country. It doesn’t mean you can buy a bank and do whatever you want.”
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