Binance Now Proposes Bank Custody For Trading Collateral To Mitigate Risk

Key Points:

• Binance proposes a setup enabling institutional clients to use bank deposits as collateral for margin trading, reducing counterparty risk.
• FlowBank and Bank Frick have been named as potential intermediaries for the service.
• The move comes as centralized cryptocurrency exchanges face growing pressure from clients looking for ways to ensure they’re insulated from potential failure.

According to Bloomberg, Binance is considering allowing some of its institutional clients to keep their trading collateral at a bank instead of on the crypto platform, which could help reduce counterparty risk.

The world’s largest crypto exchange has spoken to some of its professional customers about a setup enabling them to use bank deposits as collateral for margin trading in spot and derivatives. Swiss-based FlowBank and Liechtenstein-based Bank Frick have been mentioned as potential intermediaries for the service.

Institutional digital-asset traders have been pressing for change after the abrupt collapse of FTX late last year left many with huge losses. Crypto exchanges operate differently than traditional finance in that they not only facilitate trading but also keep assets in custody, settle transactions, and offer credit, increasing the risk of widespread pain should they fail.

Safe custody and segregation of client assets have also been the focus of Asian and European regulatory proposals, while Nasdaq Inc., Bank of New York Mellon Corp., and Fidelity Investments offer or build crypto custody solutions for institutions.

According to sources, the proposed setup hasn’t been finalized and could change, but under one version of the proposal Binance has discussed, clients’ cash at the bank would be locked up through a tri-party agreement. At the same time, the exchange lends them stablecoins to serve as collateral for margin trading.

They said that the cash kept with the bank could then be invested in money-market funds to earn interest, helping compensate for the cost of borrowing crypto from Binance. The move by Binance comes as centralized cryptocurrency exchanges face growing pressure from clients seeking ways to guarantee they’d be insulated from potential failure.

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