The CEO of Binance, Changpeng “CZ” Zhao has shared his thoughts on “two big lessons” to be learned from the FTX saga; he said that crypto companies should not use their own tokens as collateral and should also hold “large reserves”.
In a tweet on November 8, Zhao laid out two learnings after FTX’s significant “liquidity crunch”, which has finally resulted in a non-binding letter of intent from Binance to acquire the exchange in difficulties.
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.
Stay #SAFU.
— CZ Binance (@cz_binance) November 8, 2022
Two big lessons:
1: Never use a token that you have created as collateral.
2: Do not take loans if you run a cryptocurrency business. Don’t use capital “efficiently.” Have a big reserve.
Binance has never used BNB as collateral, and we have never taken debt. Stay #SAFU.
Zhao shared that his first lesson is to make sure that a company’s collateral should not consist of a token that it has created, and claims that its exchange token -BN (BNB)- has never been used as collateral for its services.
FTX’s liquidity problems seem to have come after a tweet on November 6 from Zhao in which He said that Binance would liquidate its FTX Token (FTT) holdings after “recent revelations” related to reports of links between FTX and trading company Alameda Research, showing that the company had significant FTT holdings.
Although Binance does not currently disclose proof of the reserves it uses as collateral, Zhao mentioned in a tweet on November 8 that in an effort to be fully transparent Binance soon provide to evidence of your reservations, adding:
“Banks run on fractional reserves. Crypto exchanges shouldn’t do it.”
Zhao’s second lesson from the FTX crash is that cryptocurrency businesses shouldn’t borrow and instead choose to hold large reserves.which could be in reference to FTX users who complained about slow withdrawals on Nov. 7, sparking rumors that the exchange did not have enough to cover user funds.
Zhao’s tweet confirming the liquidation of Binance’s FTT reserves ended up triggering what some called a “bank run” on the exchange; data from analytics platform CryptoQuant reveals that FTX’s bitcoin (BTC) balance had fallen by 19,956 on November 7 alone.
At the time of writing this article, FTT is down 75% in the last 24 hours; its last price was around USD 5.70 at the time of writing, compared to its opening price of $22.14.
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