(Kitco News) -
Changpeng Zhao, the CEO of Binance who found himself in the eye of the storm last week as FTX imploded, announced on Monday morning that the exchange will create a new fund to support viable crypto projects that face liquidity problems.
To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis. More details to come soon. In the meantime, please contact Binance Labs if you think you qualify. 1/2
— CZ ?? Binance (@cz_binance) November 14, 2022
In response to a question about whether FTX would have qualified for the rescue funding, CZ did not mince words. “Liars or fraud never qualify as strong projects,” he wrote. “This is for other projects in the ecosystem.”
Later in the morning, Zhao hosted an AMA on Binance’s Twitter space, which was attended by 175,000 people and wrapped up at 9:48 EST.
Among the highlights of the session was his announcement that “four or five” other firms have offered to contribute to the fund, and that he will release the names of the other companies once the nature and scale of their commitment is confirmed.
Zhao was asked about proof of reserves and the potential liquidity risks to Binance. “We ran a very simple business,” he said. “We have not taken loans from other people. We have not taken VC investments. We don't owe anybody any money.”
He also went into more detail about how Binance’s business model protects them from the kinds of liquidity crunches that destroyed FTX. “We did not give loans out of the platform,” he said. “We never take user [funds] and give it to a third party to manage and try to make yields, etcetera.”
Zhao said Binance does operate a margin program, but margin traders cannot withdraw the money away and the risk management is handled by the system if they are out of margin.
Zhao also said that while many small exchanges rely on either each other or on Binance for liquidity, the reverse is never the case.
“In their account they will typically have millions or hundreds of millions of dollars on Binance, or in another exchange, to share liquidity,” he said. “Binance, because we're the largest liquidity pool on the planet, we don't use other smaller exchanges for liquidity. All of the user funds, all of our funds stay on our platform.”
Zhao also said that the company does not try to make money from trading itself. “We're not trying to be like a hedge fund shop,” he said. “We make money through trading fees.” Binance also doesn’t try to be a market maker. “We rely very heavily on third-party market makers that provides liquidity,” he said.
Zhao was asked about the risk of exchanges like FTX holding much of their reserves in their own coins, and whether his company’s considerable holdings of their own BNB token, as well as BUSD, Binance’s own U.S. dollar-backed stablecoin, should be cause for concern.
“The short answer is no,” he said. “BUSD is the most fiat-backed stablecoin. It's audited by NYDFS, it’s not issued by Binance, it's issued by Paxos. Two very separate companies, two very separate management teams.”
Zhao said that stablecoins must play an important role in the solvency of crypto exchanges, and that in a bear market, if an exchange’s assets do not include a large percentage of stable coins, that is a “risky sign.”
As far as BNB is concerned, Zhao said it does not represent a disproportionate amount of their exchange. “If you look at the total asset value, BNB is an even smaller percentage on the exchange today.”
Zhao also said that Ethereum creator Vitalik Buterin has agreed to develop a new “proof-of-reserves” protocol for crypto exchanges, and that Binance would be the “guinea pig.” Last week, CZ shared an overview of the company’s balance sheet, but promised that a more detailed proof of Binance’s reserves would come soon.
