Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Binance has bowed to pressure from customers who want to hold their assets with an independent custodian, highlighting traders’ growing unease over the safety of the world’s largest cryptocurrency exchange since it was fined by US authorities last year.
The exchange has begun to allow some larger traders to keep their assets at independent banks, including Switzerland’s Sygnum Bank and Flow Bank, 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 on its website says it is the “only institutional custody partner of the Binance Exchange”. US regulators last year described Ceffu as a “mysterious Binance-related entity”.
“I’d much rather park my money with a Swiss bank than Binance,” said the head of a crypto trading firm, adding that “in theory you’re safer” putting money at a custodian that has oversight from regulators.
Binance said it “started exploring and developing a banking triparty solution almost two years ago, well before counterparty risk became prominent”, referring to an arrangement between Binance, its customers and a bank custodian. It 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 an exchange had risen after the collapse of Binance’s rival FTX in 2022, which has left the money of thousands of investors trapped in that company’s bankruptcy proceedings.
US authorities’ recent crackdown on Binance is also a concern. Last year the US Treasury and Department of Justice jointly levied a record $4.3bn fine on Binance after the exchange pleaded guilty to criminal charges related to money laundering and breaching international financial sanctions.
The Securities and Exchange Commission has charged Binance with 13 securities laws violations and accused it of engaging in “an extensive web of deception and conflicts of interest”. Binance is contesting the charges.
Top crypto exchanges including Binance and Coinbase have built their market shares by fulfilling multiple roles at once, such as that of a trading venue, custodian and lender. This has worried regulators — in mainstream finance, different, independent firms typically offer each of these services in order to reduce risks. Custodian banks work by holding their clients’ assets securely.
“These trading platforms, they call themselves exchanges, are commingling a number of functions,” SEC chair Gary Gensler said last year.
“My capital should never touch an exchange,” the head of one large crypto hedge fund said. They added that using Ceffu so far has been “an inevitable evil because the alternative is to leave Binance altogether.
“It works [and] the teams are different but there is a sense the decisions are still made at Binance,” they added. “The residual risk is it’s still the same place.”
The fund is now testing using one of the banks before moving its assets there entirely.
The set-up works by allowing customers to deposit their capital at the custodian in US Treasuries, on which the traders earn about 4 per cent interest due to the higher interest rate environment, two of the people said.
Binance said: “This arrangement directly tackles the issue of counterparty risk, the primary concern for institutional investors today,” adding that it has “initiated and successfully executed a risk management solution that addresses this concern for all institutional investors in the industry, allowing them to better manage risk and further scale their activity”.
The exchange added that it is “actively engaging with a host of banking partners and institutional investors who have shown interest”.
Sygnum said it had been “approached by some of its existing and prospective clients and asked whether it would be possible to design a solution that prevents them from facing substantial counterparty risk when choosing to trade on crypto exchanges”.
The digital assets bank added that “based on these numerous customer requests”, it is helping “its largest institutional customers to segregate their custody and trading counterparties”. It added that its product is being tested before it launches fully. Flow Bank did not respond to a request for comment.
Ceffu said that its corporate structure is independent of Binance. It added that its custody business is built “with segregated account and wallet systems separate from any partner exchange, including Binance”.
In spite of the US crackdown, traders say they are reluctant to cease trading on Binance altogether as it remains the world’s most liquid crypto exchange. “The liquidity is there,” said the crypto hedge fund.
Even so, its market share has dropped to 30 per cent of volume traded on exchanges compared with 55 per cent a year ago, according to CCData.