Binance, the world’s largest cryptocurrency exchange by trading volume, has entered into a strategic partnership with Swiss banking institutions to mitigate growing concerns surrounding counterparty risk in the crypto industry, as reported by the Financial Times.
This move follows Binance’s regulatory fines imposed by US authorities in 2023. As part of the collaboration, Binance has allowed “larger traders” to store their assets at independent banks, including Switzerland’s Sygnum Bank and Flow Bank, and the existing custodian Ceffu.
Binance Addresses Counterparty Risk
Previously, Binance clients could hold their assets on the exchange or through Ceffu, which US regulators described as a “mysterious Binance-related entity.” However, with the new collaboration, traders now have the opportunity to store their assets with established Swiss banks, which are subject to regulatory oversight.
The head of an unnamed crypto trading firm preferred Swiss banks to the Financial Times, stating that they offer “potentially greater security” than keeping funds on the exchange.
According to the report, Binance emphasized that it had been developing a banking triparty solution long before counterparty risk became a prominent issue. This move is part of its ongoing efforts to address industry-wide concerns.
The collapse of FTX, a rival exchange, in 2022 and US authorities’ recent regulatory crackdown on Binance have heightened concerns regarding the safety of leaving funds on exchanges.
As previously reported, Binance faced a record $4.3 billion fine after pleading guilty to criminal charges related to money laundering and breaching international financial sanctions.
The US Securities and Exchange Commission (SEC) has also charged Binance with multiple securities law violations, alleging “an extensive web of deception and conflicts of interest.” The exchange formerly led by Changpeng Zhao (CZ) is currently contesting these charges.
Safeguarding Investor Funds?
Per the report, crypto exchanges like Binance and Coinbase have traditionally fulfilled multiple roles, including trading venues, custodians, and lenders, raising concerns among regulators.
Different independent firms typically offer these services to reduce risks in mainstream finance. Custodian banks play a crucial role by securely holding clients’ assets. Trading platforms’ commingling of functions has prompted regulators to call for greater separation to safeguard investor funds.
Binance stated that the collaboration with Swiss banks directly addresses counterparty risk, a primary concern for institutional investors in the industry.
The Financial Times reports that traders can earn approximately 4% interest due to the higher interest rate environment by allowing customers to deposit their capital at the custodian in US Treasuries.
The report further highlights that the exchange actively engages with banking partners and institutional investors who have shown interest in this risk management solution.
Overall, the company’s partnership with Swiss banks represents a step in addressing counterparty risk concerns in the crypto industry. By allowing larger traders to store their assets with Swiss banks, Binance aims to enhance the security and oversight of customer funds.
While the crypto industry continues to evolve, collaborations between exchanges and established financial institutions are expected to be crucial in building trust, ensuring the protection of investor assets, and addressing regulatory concerns.
Featured image from Shutterstock, chart from TradingView.com