Binance's Tri-Party Model: How It’s Calming Institutional Investor Concerns, According to Division Head

Catherine Chen, Head of VIP and Institutional investors at Binance, sat down for an exclusive conversation with Gadgets 360 during the recently held Binance Blockchain Week in Dubai. She highlighted the growing interest in crypto among institutional investors this year, driven largely by the US SEC's approval of crypto ETFs earlier in the year.

In September, Binance CEO Richard Teng announced that the exchange had seen a 40 percent increase in institutional investments this year. He also revealed that by the first half of 2024, Binance had reached 200 million users, accounting for approximately 36 percent of the global crypto user base.

Speaking to Gadgets 360, Chen explained that the volatility of crypto assets continues to make investors hesitant to engage with them. She noted that the key challenge for exchanges in gaining trust from both large and small investors is ongoing research to identify the needs of potential users and develop services that offer clients a sense of stability and confidence.

Binance's Tri-Party Arrangement

Having transitioned from the traditional financial ecosystem to crypto, Chen observed that investors—particularly high-net-worth individuals and corporate entities—feel secure when partnering with familiar, established banks to manage their finances. However, she noted that this same level of trust is often absent in decentralised finance, which eliminates the role of intermediaries like banks in transactions between parties.

“Let's say, an institutional client, for them to open an account and start trading, for instance, they still need to do considerable amount of due diligence. We very closely engage with our institutional clients to try and understand what their pain points are. This is when I usually name the example of the banking tri party arrangement which we rolled out last year,” she said.

In this system – Binance, the institutional investor, and banks come into an arrangement as three individual parties.

“We basically design and then come up with banking triparty, whereby we allow our client to post dollar or dollar equivalent collateral to a bank. This stays in the client's name in separate, customised accounts, okay with the bank and our balance sheet. We then give client a loan so that they can use towards trading on Binance.com,” Chen explained.

In systems like these, investor apprehensions around tying up funds to a crypto exchange are eased out. The involvement of a bank makes investors more trustworthy about the safety of their funds. Essentially, Chen implied that while cryptocurrencies have begun to grab the attention of HNIs, they still prefer a layer of centralisation perhaps out of familiarity and habit.

“We've been engaging with a lot of institutional investors, and this is something that everybody wants among the institutional investors. So again, this reduces friction, helps investors mitigate the counterparty risks they are concerned about. And again, it's something that both crypto native, large scale, crypto native institutional client or the newly entrant asset manager or institutional clients wants,” Chen highlighted.

The exchange refused to disclose the names of lenders that it is working with to retain its large scale investor clients.

To Institutional Investors and Platforms Seeking to Rope Them as Clients

In recent years, companies like Tesla and MicroStrategy have invested in crypto assets. Various other corporates like Apple and Microsoft, meanwhile, have refrained from adding crypto assets to their respective investment portfolios. In fact, Microsoft recently posted a feedback form asking its shareholders if the company should include crypto investments on its balance sheets. As part of the recommendation from the board, the form asks users to vote against Microsoft assessing crypto investments.

In a suggestion to these firms, Chen said it's time to embrace technology.

“If there is a way to very easily integrate Apple Pay with crypto payment — that would just massively reduce so many friction points in transactions. Frankly, it's a lot more efficient of a settlement method with you cutting out the middle mate. For big existing incumbents like Apple and Microsoft, if they are able to basically embrace the asset class and recognise the value that is bringing it will smoothen the overall journey of mass adoption,” the Binance official stated.

The lack of reliable information around virtual digital assets (VDAs) is making investor education challenging for crypto firms, the Binance official said. Addressing the emerging exchanges and firms looking to deal with institutional investors, Chen said, the focus should first be on conducting awareness initiatives.

Along with the pros of investing in crypto, the community needs to be informed about the risks and potential consequences that volatile assets like BTC pose, Chen said. She believes that the ecosystem of traditional finance is now on auto-pilot – sustaining the existing technologies.

In a message to potential investors, she said crypto and blockchain are definitely going to be a big part of the future of finance – and the sooner people receive accurate awareness about VDAs, the easier their transition will be to more advanced financial services.

However, the 2.4 million cryptocurrencies currently in circulation are highly susceptible to significant fluctuations due to industrial, economic, political, or geographic changes, whether on a macro or micro scale. Industry experts strongly recommend that potential investors conduct thorough research before engaging with crypto assets and platforms.