Binance, the largest crypto exchange in terms of trade volume and users, plans to start allowing institutional investors to store their crypto collateral used for leveraged trading offline, CoinDesk reported citing Bloomberg.

Rather than having institutional investors hold the collateral on the platform’s hot wallets connected to the internet, Binance will have it stored in its Custody platform in cold storage wallets. During an active trade, the assets will be committed to the position and only become accessible once it is closed and settled.

Storing Collateral in Cold Storage Will Build Trust

Hot wallets, such as those used by exchanges to facilitate real-time trading, are often prone to hacks, and their safety depends on the exchange’s in-house security. Furthermore, individual trading accounts can be compromised, leading to the loss of valuable digital assets. Having institutional investors store their collateral with Binance Custody will provide the additional security cold wallets offer.

In addition, the collapse of FTX caused crypto-wide anxiety regarding digital asset reserves held by crypto exchanges. Having collateral stored in cold storage means that the digital assets of institutional investors are separate and can be accessed efficiently during periods of market volatility without the usual bottlenecks brought about by massive customer withdrawals.

Binance Outflows Have Almost Reduced to Pre-FTX Collapse Levels

Like most crypto exchanges, in the last two months of 2022, Binance experienced a higher-than-normal rate of customer withdrawals due to two events. The first was the collapse of FTX in mid-November. The second was when auditor Mazars announced in mid-December that it was suspending all crypto auditing services.

Data from CryptoQuant now shows that the rate of withdrawals (green histograms) by Binance customers has eased with the new year, as seen in the chart below.

~By John P. Njui~