Binance, a leading cryptocurrency exchange, has introduced a feature allowing traders to secure their assets with independent financial institutions, including Switzerland’s Sygnum Bank and Flow Bank. Prior to this modification, Binance clients were limited to storing their assets on the exchange or through the custodian Ceffu, a entity referred to as a “mysterious Binance-related entity” by U.S. regulators.
According to report, a crypto trading firm executive expressed a preference for a Swiss bank over Binance for asset custody, citing perceived safety and regulatory oversight as key factors.
Binance claims to have developed a banking triparty solution almost two years ago, citing counterparty risk as a widespread concern in the industry, not exclusive to Binance. The arrangement involves Binance, its customers, and a bank custodian.
This shift towards independent custodianship follows the collapse of FTX in 2022, which heightened concerns about leaving funds on exchanges. Binance faced its own legal challenges last year, with the U.S. Treasury and Department of Justice imposing a record $4.3 billion fine for money laundering and breaching financial sanctions. Additionally, the SEC charged Binance with multiple securities law violations, currently under contention by the exchange.
The regulatory concern surrounding exchanges operating as trading venues, custodians, and lenders simultaneously has been highlighted by SEC chair Gary Gensler. Traditional finance typically segregates these roles among independent firms to mitigate risks.
Some large crypto hedge funds were reluctant to use Binance’s custody partner due to perceived overlaps in decision-making. Consequently, these funds are exploring partnerships with independent banks for asset custody.
Binance asserts that the new custodial arrangement effectively addresses the primary concern of counterparty risk for institutional investors, enabling better risk management and scaling of activities. The exchange is actively engaging with various banking partners and institutional investors interested in this solution.
Sygnum Bank confirmed that clients approached them to develop a solution minimizing counterparty risk when trading on crypto exchanges. The bank is currently testing a product to help institutional customers segregate custody and trading counterparties.
Despite these changes, traders exhibit hesitancy in completely migrating from Binance due to its liquidity, even though its market share has decreased from 55% to 30% over the past year.
