Binance reportedly considers allowing collateral at banks

This move comes in reaction to demands from institutional digital asset traders for enhanced security measures after the failure of FTX, which resulted in significant losses for several traders

Cryptocurrency exchange Binance is reportedly considering a possible solution to lower counterparty risk by permitting some of its institutional clients to keep their trading collateral at a bank rather than the crypto platform, as per Bloomberg.

This move comes in reaction to demands from institutional digital asset traders for enhanced security measures after the failure of FTX in late 2022, which resulted in significant losses for several traders.

As per unnamed sources familiar with the matter, Binance has reportedly engaged in negotiations with select professional customers on a setup that would allow them to use bank deposits as collateral for margin trading in spot as well as derivatives markets. Two probable intermediaries for this service, Swiss-based FlowBank and Liechtenstein-based Bank Frick, were mooted, nonetheless the specifics of any possible collaboration remain private.

Under the plan, client funds held at the bank would be secured via a tri-party accord, while Binance would provide stablecoins as collateral for margin trading. The funds deposited with the bank could be invested in money market funds, allowing clients to earn interest and offset the cost of borrowing crypto from Binance.

As per the anonymous sources, the proposed arrangement is still under negotiation and subject to potential modifications.

During a May 29 interview on the Bankless Podcast, Binance Chief Executive Officer Changpeng Zhao addressed the idea of Binance buying a bank and turning it crypto-friendly. Zhao admitted that Binance had reviewed the idea but described the difficulties involved. He indicated that buying a bank would be restricted to the jurisdiction of that specific country and would still need abidance with local banking regulators.