- Binance launched a pilot program allowing institutions to hold collateral in bank custody rather than on the exchange, reducing counterparty risk
- Counterparty risk refers to the likelihood the other party in a transaction may default; crypto exchanges expose traders to this risk
- Binance’s solution mirrors traditional finance, giving institutions more control over risk exposure by not locking up assets on the exchange
Binance recently launched an innovative pilot program that enables institutions to hold collateral in bank custody rather than on the crypto exchange. This reduces counterparty risk and gives institutions more flexibility in managing risk.
What is Counterparty Risk?
Counterparty risk refers to the likelihood that the other party in a transaction may default on their obligations. For crypto exchanges, traders typically have to deposit their assets on the platform before they can trade. This means they are exposed to counterparty risk if the exchange halts withdrawals or goes offline.
Binance’s Solution: Third-Party Bank Custody
Binance’s new program allows institutions to hold collateral at a partner bank rather than depositing it on the exchange. The collateral can be in the form of cash or treasury bonds, enabling institutions to earn yields while trading.
This framework mirrors how traditional finance markets operate and gives institutions more control over their risk exposure. They can allocate crypto assets based on their risk tolerance since the assets are not locked up on the exchange.
Looking Ahead
According to Binance, this program has been in development for over a year. They are currently in discussions with multiple banking partners and institutional investors who have expressed strong interest.
The exchange plans to continue expanding the program to accommodate more participants. Allowing third-party custody helps address a long-standing concern of institutions and enables wider adoption in the crypto space.
Conclusion
By replicating common risk management practices in traditional finance, Binance’s new collateral custody program aims to provide institutions with more flexibility. This reduces counterparty risk, which has been a significant barrier to institutional crypto adoption. If successful, it could enable more institutions to confidently allocate to crypto assets.
