Binance has launched a pilot initiative to allow banks to hold trading collateral off the exchange to reduce counterparty risk for large clients. The program, launched on November 30, aims to reinvent crypto collateral management using a paradigm similar to traditional financial markets.
Institutions can now protect their collateral at a third-party bank instead of the exchange under this scheme. Binance underlines that this new technique coincides with a risk-based allocation strategy used in traditional finance, allowing investors to customize crypto-asset allocations to their risk tolerance. In this case, institutions can trade with cash or Treasury bonds as collateral, earning yields.
![Binance introduces pilot program for secure collateral storage with banks image 125](https://i0.wp.com/nosisnews.com/wp-content/uploads/2023/11/image-125.png?resize=953%2C470&ssl=1)
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Binance executive Catherine Chen said the exchange has been developing this initiative for over a year. Binance hopes to expand its trial program after its launch. Chen said the exchange would answer institutional investors’ counterparty risk worries. She said, “Institutional investors across the industry have long worried about counterparty risk. Our crypto natives and traditional financial professionals have been discussing a banking triparty agreement for over a year to solve their issue.”
The initiative aims to address counterparty risk, the danger that one party will default on its contractual responsibilities. Counterparty risk sometimes requires traders to deposit cryptocurrencies or cash directly on centralized exchanges before trading.
This puts traders at risk of losing assets if the exchange experiences outages or suspends withdrawals. Binance claims that its new pilot program would alleviate institutional concerns about these risks and change collateral management dynamics.
Binance’s effort is not alone in solving this cryptocurrency issue. Deribit, another cryptocurrency exchange, began developing a cryptography system with MPC wallet provider Fireblocks on November 28. This method also allows traders to perform swaps without putting their assets directly on the exchange, demonstrating a wider industry trend to improve market security and risk management.
As exchanges continue to innovate, risk and collateral management in the crypto market will improve, giving institutional traders more security and flexibility.
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