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Binance Launches Off-Exchange Pilot Bringing Safer DeFi to Institutions

Binance has introduced a pilot program enabling banks to custody trading collateral outside the exchange to mitigate counterparty risk for institutional investors. This initiative marks a significant step in combining traditional banking practices with blockchain tech.

On November 30, leading crypto exchange Binance announced a pilot program that enables banks to store trading collateral off-exchange, which aims to lower counterparty risk in crypto transactions.

"The world's first cryptocurrency triparty arrangement with a third-party banking partner," available on the Binance VIP and institutional clients platform, allows institutional investors to store trading collateral with a third-party banker. This setup addresses counterparty risk by mirroring traditional financial market practices, permitting investors to manage their crypto asset allocation per their risk tolerance. Collateral can consist of fiat or treasury bills and provides the added benefit of yielding assets while trading.

Catherine Chen, Head of VIP and Institutional at Binance, emphasized the importance of addressing counterparty risk, a persistent concern among institutional investors. "Our team, consisting of crypto natives and traditional finance professionals, has been exploring a banking triparty agreement for over a year," Chen said.

The pilot involves collaboration with major banks to ensure adherence to rigorous regulatory practices.

"We are in close discussions with an array of banking partners and institutional investors who have also expressed strong interest in participating."

The program's partnerships are essential for building trust and security in the DeFi ecosystem. They are designed to comply with global financial regulations, including strict anti-money laundering measures, by featuring advanced encryption, regular audits, controlled access, and comprehensive risk management to counter market volatility and uncertainty.

Binance is not the only player in the market addressing these concerns. Similar initiatives, like that announced by MPC wallet provider Fireblocks, indicate a growing industry trend toward enhancing transaction security without requiring asset deposits on exchanges.

In August, Binance responded to the increasing demand for secure crypto trading tools for institutional players by introducing MirrorX. Developed in partnership with Ceffu, MirrorX is an off-exchange settlement solution, exclusive to Binance VIP & institutional clients.

It allows the storage of digital assets in Ceffu's third-party custody, with a seamless mirroring feature to a Binance sub-account at a one-to-one ratio. Once assets are mirrored to Binance, they are securely held in Ceffu's omnibus account, under a dedicated third-party custodian sub-account managed by Ceffu. This enables clients to tap into Binance's diverse ecosystem, including spot, margin, and futures trading, and ensures their assets are independently and securely held under Ceffu's custody.

Binance's bank custody pilot and tools like MirrorX could pave the way for more integration between traditional finance and the DeFi sector, potentially inspiring other banks and crypto firms to develop similar services, and close the gap between the two.