Binance launches pilot program for bank custody of collateral

Cryptocurrency exchange Binance has launched a pilot program allowing banks to store trading collateral outside of the exchange, according to a Nov. 30 announcement. Binance stated that the program will help reduce counterparty risk.

According to the announcement, the program allows institutions to hold collateral in a third-party bank instead of depositing it on the exchange. This "replicates a common framework in traditional financial markets, which allows investors to proportion their allocation of crypto assets based on their risk tolerance," the announcement said. Collateral can be held in the form of cash or treasuries, allowing institutions to earn yield while trading.

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

“Counterparty risk has long been a concern for institutional investors across the industry. Our team of crypto natives and traditional finance professionals have been exploring a three-way banking arrangement for over a year to address your concern. [...] “We are in close discussions with a number of banking partners and institutional investors who have also expressed strong interest in participating.”

Counterparty risk is definite as the probability that one of the parties involved in the transaction may default on its “the likelihood or probability that one of . In the context of centralized exchanges, it refers to traders generally needing to deposit their cryptocurrencies or cash on the exchange before trading. This means that if the exchange goes offline or stops withdrawals, traders could lose their assets. In its announcement, Binance stated that this new pilot program will help alleviate institutions' concerns about these risks.

Binance is not the only exchange that has sought to solve this problem. On November 28, cryptocurrency exchange Deribit partnered with wallet provider MPC Fireblocks to create a cryptographic system That also allows traders to make swaps without depositing on the exchange.