Binance opens door for external custody of crypto assets

Binance has started allowing some of its larger traders to use independent banks for holding their assets. The move comes as traders are unease over the security of assets on the world’s largest cryptocurrency exchange, especially following its recent fine by US authorities.

Binance is now enabling these traders to store their assets with independent financial institutions like Switzerland’s Sygnum Bank and Flow Bank. Before this change, Binance clients could only keep their assets on the exchange or through custodian Ceffu, which the US regulators last year labeled as a “mysterious Binance-related entity”.

A crypto trading firm executive told the Financial Times that they prefer a Swiss bank over Binance for asset custody, citing the perceived safety and regulatory oversight of such institutions.

Binance stated that it developed a banking triparty solution almost two years ago, citing the counterparty risk as a concern across the industry, not just for Binance. The arrangement involves Binance, its customers, and a bank custodian.

The move to independent custodianship comes in the wake of the collapse of FTX in 2022, which heightened concerns about leaving money on exchanges. Binance’s own legal troubles have added to these worries. Last year, the US Treasury and Department of Justice imposed a record $4.3 billion fine on Binance for criminal charges related to money laundering and breaching financial sanctions. The SEC has also charged Binance with multiple securities law violations, which the exchange is currently contesting.

The practice of exchanges like Binance and Coinbase operating simultaneously as trading venues, custodians, and lenders has been a regulatory concern. In traditional finance, these roles are usually performed by separate, independent firms to mitigate risks. SEC chair Gary Gensler highlighted last year the risks associated with exchanges combining multiple functions.

Some large crypto hedge funds were also reluctant to use Binance’s custody partner due to perceived overlaps in decision-making. These funds are now exploring using independent banks for asset custody.

Binance asserts that the new arrangement addresses the primary concern of counterparty risk for institutional investors, allowing for better risk management and scaling of activities. The exchange is engaging with various banking partners and institutional investors interested in this solution.

Sygnum Bank confirmed being approached by clients to develop a solution that minimizes counterparty risk when trading on crypto exchanges. It is currently testing a product to help institutional customers segregate their custody and trading counterparties.

Despite these changes, traders remain hesitant to leave Binance entirely due to its liquidity, although its market share has dropped from 55% to 30% over the past year.