Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, selects her favorite stories in this weekly newsletter.
Binance has come under pressure from customers who want to keep their assets with an independent custodian, highlighting traders' growing concern about the safety of the world's largest cryptocurrency exchange since US authorities fined it last year.
The exchange has begun allowing some large traders to hold their assets at independent banks, including Sygnum Bank and Flow Bank in Switzerland, according to three people with knowledge of the arrangements. Previously, Binance clients could only hold their assets either on the exchange or through custodian Ceffu, which says on its website that it is “the only institutional custodian partner of the Binance exchange.” US regulators last year described Ceffu as a “murky entity linked to Binance.”
“I would rather put my money in a Swiss bank than Binance,” the head of the cryptocurrency trading company said, adding that “in theory you are safer” when putting money in a custodian overseen by regulators.
Binance said it “began exploring and developing a three-party banking solution approximately two years ago, long before counterparty risk became apparent,” referring to the arrangement between Binance, its clients and the bank's custodian. She declined to comment on the names of the banks and added: “Counterparty risk is an industry concern, not specific to Binance.”
Traders said the risk of leaving their money on the exchange rose after Binance rival FTX collapsed in 2022, leaving thousands of investors' money trapped in that company's bankruptcy proceedings.
The recent crackdown on Binance by US authorities is also cause for concern. Last year, the US Treasury Department and Department of Justice imposed a record $4.3 billion fine on Binance after the exchange pleaded guilty to criminal charges related to money laundering and violating international financial sanctions.
The SEC charged Binance with 13 violations of securities laws and accused it of engaging in a “vast web of deception and conflicts of interest.” Binance disputes these accusations.
The top cryptocurrency exchanges, including Binance and Coinbase, have built their market shares by fulfilling multiple roles simultaneously, such as that of trading venue, custodian, and lender. This has raised concerns from regulators – in the mainstream finance sector, different independent firms typically offer each of these services in order to mitigate risk. Custodial banks work by holding their clients' assets securely.
“These trading platforms, which call themselves exchanges, blend a number of functions,” SEC Chairman Gary Gensler said last year.
“My capital should never touch the stock exchange,” said the head of a large cryptocurrency hedge fund. They added that using Ceffu so far has been a “necessary evil because the alternative is to leave Binance altogether.”
“It works [and] They added that the teams are different but there is a feeling that decisions are still being made at Binance. “The remaining risk is that it's still in the same place.”
The fund is now testing the use of a bank before moving its assets there entirely.
The setup works by allowing customers to deposit their capital with a custodian of U.S. Treasuries, where traders earn about 4 percent interest due to the high interest rate environment, two of the people said.
“This arrangement directly addresses the issue of counterparty risk, which is the primary concern of institutional investors today,” Binance said, adding that it had “initiated and successfully implemented a risk management solution that addresses this concern for all institutional investors in the industry, allowing them to do so.” To better manage risks and expand the scope of their activity.”
The exchange added that it is “actively engaging with a group of banking partners and institutional investors who have expressed interest.”
Sygnum said that “some of its current and potential clients have contacted it and asked if it is possible to design a solution that would prevent them from facing significant counterparty risk when choosing to trade on cryptocurrency exchanges.”
The digital asset bank added that “based on these numerous client requests,” it is helping its “largest institutional clients separate custody and trading counterparties.” She added that her product is being tested before being fully launched. Flow Bank did not respond to a request for comment.
Ceffu said that its corporate structure is independent from Binance. It added that its custodial business is built “with separate accounts and separate wallet systems from any partner exchange, including Binance.”
Despite the US crackdown, traders say they are reluctant to stop trading on Binance completely as it remains the world's most liquid cryptocurrency exchange. “Liquidity is there,” the cryptocurrency hedge fund said.
However, its market share fell to 30 percent of trading volume on exchanges compared to 55 percent a year ago, according to CCData.
