Binance Yields to Trader Preferences for Storing Assets Externally

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In response to its clients’ demands, Binance has agreed to let them keep their funds with separate custodians, emphasizing the unease among traders about the security of the leading cryptocurrency exchange following a penalty from US regulators the previous year.

Certain high-volume traders are now able to have their assets secured by independent financial institutions, including Sygnum Bank and Flow Bank of Switzerland, as informed by three individuals aware of these new provisions. In the past, Binance allowed its users’ assets to be housed either directly on the platform or through its custody partner Ceffu, which is touted on its own site as Binance Exchange’s “sole institutional custody associate”. After labeling Ceffu a “mysterious Binance-associated firm”, US regulators criticized the entity last year.

A crypto trading company’s executive expressed preference for Swiss banks over Binance, arguing that theoretically, a custodian regulated by authorities offers greater security for one’s funds.

Binance remarked it has been considering and creating a triparty banking solution with almost two years of forethought, indicating its proactive actions prior to the awareness of counterparty risk. The company opted not to discuss specific banks, stating that counterparty risk is a worry that pervades the industry, not just Binance itself.

Risks associated with leaving money on an exchange have been perceived as heightened after the downfall of FTX, a Binance competitor, last year – an event which consequently led to investors having funds locked in the ensuing bankruptcy process.

Binance’s operations have also caught the attention of US officials. A penalty of $4.3 billion was imposed on the company as they acknowledged criminal allegations involving money laundering and the violation of international financial sanctions, as issued in a joint effort by the US Treasury and Department of Justice. Furthermore, the Securities and Exchange Commission has accused Binance of committing a series of securities law breaches, alleging them of extensive deceptive practices and conflicts of interest — allegations that Binance is actively challenging.

Leading cryptocurrency exchanges like Binance and Coinbase have secured their positions in the market by assuming multiple roles simultaneously, including as trading platforms, custodians, and lenders. Such practices have been met with apprehension by regulators who, in the traditional finance sector, prefer these services to be offered by separate, independent entities to mitigate risk. Custodian banks are charged with the responsibility of safely holding their clients’ assets.

SEC chair Gary Gensler criticized such crypto trading platforms last year, citing their conflating of various financial functions.

The manager of a well-known crypto hedge fund stated that their capital should never mingle with an exchange’s funds, pointing out that using Ceffu has been a necessary compromise to avoid completely withdrawing from Binance.

While acknowledging Ceffu’s operational independence, the fund manager suggested a lingering concern that decisions might be influenced by Binance, thus implying a residual risk. Currently, the fund is evaluating the use of one of the banks prior to fully transitioning their assets.

This arrangement permits customers to place their capital in US Treasuries held by the custodian, yielding roughly 4 percent interest as per the prevailing higher interest rate climate, as explained by two insiders.

Binance claims this model squarely addresses the issue of counterparty risk, which is the predominant worry for institutional investors today. The firm elaborates on its achievement in devising and executing a risk management solution that mitigates this concern for all institutional investors in the sector, facilitating them to enhance risk management and expand their activities.

The exchange is reportedly in active discussions with numerous banking partners and institutional investors who have demonstrated interest.

According to Sygnum, multiple clients, both existing and potential, have approached the bank for a solution to alleviate their substantial counterparty risk when engaging in crypto exchange trades.

Based on these client requests, Sygnum is aiding its largest institutional clients in creating a system that separates custody and trading counterparties. The bank notes its product is in the testing stage before it becomes fully operational. Flow Bank has not provided any comments.

Ceffu maintains that its organizational structure is autonomous from Binance and that its custody business is structured around an account and wallet system that is distinct from any exchange partners, Binance included.

Despite the regulatory challenges in the US, traders are hesitant to stop using Binance due to its status as the most liquid crypto exchange globally. According to the chief of the crypto hedge fund, this liquidity is vital.

Nonetheless, its share of the market has diminished to 30 percent of the volume on exchanges, down from 55 percent just the year earlier, as tracked by CCData.