Binance Trials Program to Reduce Counterparty Risk for Investors
On November 30, 2023, Binance, a global blockchain ecosystem that powers the largest cryptocurrency exchange by trading volume, successfully executed the first-ever triparty agreement in the history of cryptocurrencies with a third-party banking partner.
The most recent information indicates that institutional investors will be able to store trade collateral offsite, in the safekeeping of a third-party banking partner, once this solution is implemented.
This is the first of several pilot programs that Binance, the only cryptocurrency exchange that provides this kind of service at the moment, has started.
The company wants to address counterparty risk head-on, as it is one of the biggest worries for many institutional investors.
Head of VIP and Institutional at Binance Catherine Chen had this to say:
“Counterparty risk has long been a concern of institutional investors across the industry. Our team, of crypto natives and traditional finance professionals, has been exploring a banking triparty agreement for more than a year to address their concern.”
According to Investopedia, counterparty risk is “the likelihood or probability that one of those involved in a transaction might default on its contractual obligation."
It refers to the fact that traders typically have to deposit their cryptocurrency or cash on the exchange in order to trade. This is especially true for centralized exchanges.
This implies that traders risk losing their money if the exchange suspends or goes offline.
According to Binance's announcement, institutions' worries about these risks will be allayed by this new pilot program.
Not just Binance, but other exchanges have also tried to address this issue. On November 28, MPC wallet provider Fireblocks and cryptocurrency exchange Deribit collaborated to develop a cryptographic system that enables traders to conduct swaps without making deposits on the exchange.
Sources:
https://finbold.com/binance-trials-triparty-agreement-to-reduce-counterparty-risk-for-investors/
https://cointelegraph.com/news/binance-launches-pilot-program-bank-custody-collateral
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