Facing growing unease from traders over the safety of the world’s largest cryptocurrency exchange, Binance has yielded to customer pressure by enabling certain larger traders to hold their assets with independent custodians. This move comes in the wake of the exchange being fined by US authorities last year.

Previously, Binance clients were limited to holding their assets either on the exchange or through custodian Ceffu, a “mysterious Binance-related entity,” according to US regulators. However, some traders are now allowed to keep their assets at independent banks, including Switzerland’s Sygnum Bank and Flow Bank, sources familiar with the arrangements revealed.

“I’d much rather park my money with a Swiss bank than Binance,” expressed the head of a crypto trading firm, emphasizing the perceived safety of entrusting funds to a custodian overseen by regulators.

Binance confirmed that it began exploring a banking triparty solution nearly two years ago, well before concerns over counterparty risk gained prominence. The exchange declined to disclose the names of the banks involved, stating that counterparty risk is an industry-wide concern and not specific to Binance.

Traders have become increasingly cautious about leaving their funds on exchanges following the collapse of Binance’s rival FTX in 2022, which left the money of numerous investors trapped in bankruptcy proceedings.

The recent crackdown on Binance by US authorities has added to these concerns. In 2023, the exchange faced a record $4.3 billion fine after pleading guilty to criminal charges related to money laundering and breaching international financial sanctions. The Securities and Exchange Commission (SEC) has also charged Binance with 13 securities laws violations, accusing it of engaging in an “extensive web of deception and conflicts of interest.” Binance is contesting these charges.

The move to allow assets with independent custodians is seen as a response to address counterparty risk, a primary concern for institutional investors. Some traders, however, remain cautious, expressing that using custodians like Ceffu is viewed as an “inevitable evil” due to concerns about decision-making proximity to Binance.

Binance clarified that the arrangement directly tackles counterparty risk and has successfully executed a risk management solution for institutional investors. The exchange is actively engaging with various banking partners and institutional investors interested in the new setup.

Sygnum Bank stated that it was approached by clients seeking a solution to mitigate substantial counterparty risk when trading on crypto exchanges. The digital assets bank is currently assisting its largest institutional customers in segregating their custody and trading counterparties.

Despite the regulatory challenges and customer concerns, Binance remains the world’s most liquid crypto exchange. Traders, while acknowledging the exchange’s liquidity, highlight a drop in market share from 55% to 30% of volume traded on exchanges compared to a year ago, according to CCData.

By Delino Gayweh
Serrari Financial Analyst
January 29, 2023