Binance launches pilot program for bank custody of collateral

Crypto exchange Binance launched a pilot program that allows banks to store trading collateral off-exchange, according to a Nov. 30 announcement. Binance claimed that the program would help reduce counterparty risk.

According to the announcement, the program allows institutions to hold collateral at a third-party bank instead of depositing it on the exchange. This “replicates a framework common in traditional financial markets, which enables investors to proportion their crypto-asset allocation based on their risk tolerance,” the announcement stated. Collateral can be held in the form of cash or Treasury bonds, allowing institutions to earn yields while they trade.

According to Binance executive Catherine Chen, the exchange has been developing the program for at least a year and plans to expand the program even more in the future, as she stated:

“Counterparty risk has long been a concern of institutional investors across the industry. Our team of crypto natives and traditional finance professionals has been exploring a banking triparty agreement for more than a year to address their concern […] We are in close discussions with an array of banking partners and institutional investors who have also expressed strong interest in participating.”

Counterparty risk is defined as “the likelihood or probability that one of those involved in a transaction might default on its contractual obligation,” according to Investopedia. In the context of centralized exchanges, it refers to traders generally needing to deposit their crypto or cash on the exchange before trading. This means that if the exchange goes offline or halts withdrawals, traders could lose their assets. In its announcement, Binance claimed that this new pilot program will help to alleviate institutions’ concerns about these risks.

Binance isn’t the only exchange that has sought to solve this problem. On Nov. 28, crypto exchange Deribit teamed up with MPC wallet provider Fireblocks to create a cryptographic system that also allows traders to perform swaps without depositing on the exchange.