Binance is reportedly examining a proposal to offer its institutional clients the option to secure their collateral outside the crypto exchange in a bid to reduce counterparty risk.
The move comes amidst growing calls from institutional digital-asset traders for a much-needed change after FTX’s dramatic collapse late last year that led to significant losses.
Reducing Counterparty Risk
According to anonymous sources familiar with the matter, Binance is holding discussions with some professional customers about a setup that would enable them to use bank deposits as collateral for margin trading in spot and derivatives.
Names of two potential intermediaries – Swiss-based FlowBank and Liechtenstein-based Bank Frick – have been mentioned, but details on further deliberations remained private. However, both financial institutions have refrained from commenting on the setup.
Bank Frick, for one, cited banking secrecy laws and declined to comment. FlowBank, on the other hand, said its license does not cover crypto trading.
The proposed arrangement has not been finalized and is subject to potential modifications. One iteration of the proposal entails locking up clients’ cash at the bank via a tri-party agreement while Binance lends them stablecoins to serve as collateral for margin trading.
Meanwhile, the cash held at the bank could be invested in money-market funds to enable clients to earn interest and compensate for the cost of borrowing from the crypto exchange.
Regulatory Crackdown on Binance
The development comes amidst increased regulatory scrutiny of Binance in recent months. FTX’s downfall catalyzed the crackdown on the asset class with Binance in the middle of a coordinated attack on crypto by the United States financial regulators, including the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), and the New York Department of Financial Services (NYDFS).
Binance was also shunned by Australian banks and fiat providers this year. The crypto exchange has been in hot water with regulators after its derivatives license was canceled by the Australian Securities and Investments Commission (ASIC) over allegations of misleading and enabling retail investors in the country.
Binance’s Australia division notified users of suspending Australian dollar services on May 18th after its domestic payment services provider Zepto was instructed to stop support for the exchange. Soon after this, the traders rushed in to cash out their crypto holdings before the local bank closes withdrawals. This subsequently resulted in Bitcoin trading at a hefty discount on the platform.