Proposal to keep cash as collateral for transactions at a bank
Major crypto asset (virtual currency) exchange Binance is considering a system in which some of its customers, such as institutional investors, store transaction collateral in banks. One of the objectives is to reduce counterparty risk. Bloomberg reported on the 30th.
Binance is in talks with some institutional customers about using bank deposits as collateral for spot and derivatives trading, according to four people familiar with the matter.
One of the ways Binance proposed was to have customers’ cash held in a bank and locked away under an agreement, with Binance lending stablecoins to customers as collateral for margin trading. be done.
In this case, customers can also earn interest by investing their cash held in banks in money market funds to cover the cost of borrowing cryptocurrencies from Binance.
Switzerland-based FlowBank and Liechtenstein-based Bank Frick were among the names of the people who would deposit the cash, according to people familiar with the matter.
Binance and Bank Frick declined to comment on the matter. FlowBank also declined to comment on its deal with Binance, stating that the bank’s license does not include cryptocurrency trading.
Cryptocurrency exchanges not only mediate transactions, but often play various roles such as transaction settlement, asset custody, and credit provision, and some point out the risk of concentration. In particular, after the major virtual currency exchange FTX went bankrupt, the impact on customer assets in the event of bankruptcy began to be discussed.
As Binance is considering, depositing cash as collateral with third-party banks will ease the centralization of various functions of cryptocurrency exchanges.
Changpong Zhao (CZ), CEO of Binance, said in an interview on Wednesday that Binance had once considered buying a bank, but the risk, low profitability and the need for extensive rules and regulatory compliance led to the decision. He said he was discouraged.
What is Binance
Operates a major virtual currency exchange with a large number of traded stocks, trading volume, and registered users. In addition, we are developing a wide range of businesses such as the activities of the venture capital department, the provision of educational content, and philanthropic activities. In November 2010, the company announced its entry into the Japanese market.
▶️Cryptocurrency Glossary
When FTX went bankrupt in November 2022, the deposited funds could not be withdrawn, causing huge losses to institutional investors and individual traders. Among the FTX Group, FTX Japan resumed withdrawal of customer assets from February.
Regarding FTX, there was a problem that customer assets and FTX assets were not separately managed, and customer assets were illegally diverted to sister company Alameda Research.
Fed and others closely monitor the relationship between the cryptocurrency industry and banks
The US Federal Reserve Board (FRB) and the International Monetary Fund (IMF) are paying close attention to the risks posed by the relationship between the cryptocurrency industry and banks.
In March, the IMF issued a report to G20 countries discussing the macro-financial implications of cryptocurrencies and the risks they could pose to banks. It is said that indirect links will be created by financial institutions providing credit to virtual currency companies and accepting virtual currencies as collateral for loans.
connection: IMF warns of cryptocurrency impact on banks = G20 report
Fed Chairman Jerome Powell also said in March that banks should be cautious about getting involved because “we see a lot of turmoil” in the crypto space sector, including a lack of transparency.
connection: Powell Fed Chairman “Banks should pay close attention to their involvement with virtual currencies”
