Binance considers allowing investors to hold collateral in banks

Binance is exploring the possibility of letting some of its institutional clients hold their trading collateral for margin trading in spot and derivatives at a bank, according to Bloomberg.

The exchange reportedly spoke to several institutional clients about enabling bank-held collateral deposits, with Swiss-based FlowBank and Liechtenstein-based Bank Frick named as potential intermediaries for the service by Bloomberg’s sources.

Binance, which is the world’s largest cryptocurrency, has not yet finalized the proposal, and the arrangement could still be subject to change. Neither bank has commented on the reported proposal.

According to Bloomberg’s sources, a version of Binance’s proposal involves locking clients’ cash at the bank via a tri-party agreement, with the exchange then lending stablecoins as collateral for margin trading and Binance investing the deposited amounts in money-market funds to earn interest as well as compensation for lending the stablecoins.

Unlike registered broker-dealers, crypto exchanges not only facilitate trading but also hold assets in custody, settle transactions, and provide credit. This move would separate these practices to some extent.

Binance CEO Changpeng Zhao mentioned in a May 29 interview that the exchange had considered acquiring a bank, but was deterred by risk, underwhelming profit expectations, and extensive rules and regulations.

This move comes as exchanges face pressure to guarantee safety in the event of potential failure, which became a more prominent issue after the abrupt collapse of FTX late last year that left institutional and retail traders with significant losses as deposited funds became unavailable for withdrawal.

Intensifying scrutiny

The exchange move would bring it closer in line with the requirements for registered broker-dealers in the U.S. Regulators have continued to rachet up the pressure on Binance for several years.

Most recently, the company has come under a DOJ investigation for suspicion of circumventing sanctions imposed on Russia and Russian nationals. Binance has denied those allegations. Binance has also been the subject of anti-money laundering probes in the U.S. since at least 2020.

According to a Reuters report from Dec. 12, 2022, DOJ officials have actively debated whether or not to file charges against Binance or its executives over suspicions of money laundering and criminal sanctions evasion. Binance denied the allegations, claiming in a tweet that Reuters was “wrong again.”