Binance allows traders to use third parties for custody over crypto assets
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Binance, the world’s largest crypto exchange by trading volume, recently stated that some of its largest traders may use third parties for custody over their crypto assets. These mostly include independent banks, but the move comes as quite important, as it represents the first instance of Binance allowing other financial firms to get involved.
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Binance allows users to store their funds with independent banks
The move came after traders started feeling quite uneasy regarding the safety of their assets while they were on Binance’s platform, especially after the US authorities fined the exchange.
Binance likely anticipated that the clients might withdraw their assets and turn to a different platform for their trading. To prevent this, the exchange has enabled its traders to store assets with independent financial institutions, such as Switzerland’s Sygnum Bank and Flow Bank.
Prior to this change, Binance’s users were only allowed to keep the assets on the platform or with the custodian Ceffu. However, Ceffu has been labeled as a mysterious Binance-related entity in the US, which caused many of the exchange’s customers to grow concerned. With Swiss banks now being officially allowed by Binance, many of its users seem to feel much safer storing the funds with traditional bankers, thanks to their perceived safety and regulatory oversight.
Furthermore, Binance said that it created a banking triparty solution nearly two years ago. It said that the counterparty risk is a concern not only for Binance itself but also for the wider crypto industry. The exchange has been working for a long time to address the issue, and the solution is its triparty solution which concerns Binance, its customers, as well as a bank custodian.
A series of challenges for Binance
The crypto sector has felt uneasy with crypto exchanges for well over a year now — ever since FTX collapsed in November 2022. At the time, concerns regarding leaving the money on exchanges skyrocketed, and they never really went away.
Binance’s legal battles with the US SEC and other regulators around the world further contributed to its users feeling uneasy with leaving the money in the exchange’s care. As mentioned, the exchange was even fined by the US Treasury and Department of Justice last year, being forced to pay a record $4.3 billion penalty for criminal charges related to money laundering and breaching financial sanctions.
Its own founder, Changpeng “CZ” Zhao, was forced to step down from the position of CEO, and permanently distance himself from the exchange’s leadership, which was one of the terms of the settlement.
Regulators and clients concerned with the exchanges taking on all financial roles
The regulators have grown increasingly concerned with the exchanges’ practice of operating as trading venues, lenders, custodians, and more. This does not only concern Binance, but also other major crypto platforms, like Coinbase. The SEC has highlighted the risks of having one company provide all of these services multiple times, and many have heard.
Binance soon started losing customers, including some large crypto hedge funds, who revealed that they are reluctant to use the exchange’s custody partner due to perceived overlaps in decision-making. Now, these funds are also exploring their options, including the use of independent banks for asset custody.
As for Binance, the exchange has now made its move, arguing that its decision to allow the use of independent banks should address the primary concern of counterparty risk for institutional investors. It is also supposedly engaging with several other banking partners and institutional investors who might be interested in this solution.
