The Chief Executive Officer (CEO) of Binance, Changpeng Zhao (CZ), has provided his perspective on “two big lessons” that may be taken from the “events” involving FTX. According to Zhao, cryptocurrency companies should not utilize their own tokens as collateral and should also maintain “large reserves.”
In a tweet Zhao outlined two key points from the significant “liquidity crunch”, which inevitably resulted in Binance acquiring FTX. On November 8, 2022, CZ shared the tweet advising investors to stay safe.
Two big lessons:
1: Never use a token you created as collateral.
2: Don’t borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.
Binance has never used BNB for collateral, and we have never taken on debt.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
Binance CEO points out two learnings
According to Zhao, his first piece of advice is to make sure that a company’s collateral does not consist of a token that the company itself has produced, and he asserts that his exchange’s token, known as BNB, has never been used as collateral for this purpose.
Binance does not publish proof of the reserves it utilizes as collateral at this present. However, the exchange’s CEO indicated in a tweet on November 8 that in an effort to be completely transparent, his company will soon give proof of reserves.
He added: “Banks run on fractional reserves. Crypto exchanges should not.”
In his second lesson from the failure of FTX, Zhao advises crypto businesses to avoid borrowing in favor of keeping large reserves. This may be in response to user’s complaints about slow withdrawals on November 7 on the FTX platform, which led to speculation that the exchange didn’t have enough money to cover customer deposits.
FTX’s liquidity issues appeared to have arisen after Zhao tweeted on November 6 that Binance would be liquidating its holdings of FTX Token just after “recent revelations”. The research has shown the connection between FTX and Alameda in addition with the information that the later is holding a significant amount of FTT.
Some have said that Zhao’s tweet confirming Binance’s FTT holdings liquidation sparked a “bank-run” on the exchange.