The CEO of crypto exchange giant Binance says the nascent industry has much to learn from the collapse of the embattled exchange FTX.
Hours ago, Changpeng Zhao announced that Binance intends to acquire FTX pending a full due diligence analysis of the business.
The stunning turn of events followed a deluge of doubt on the state of FTX’s financials and concerns that the company relied far too heavily on holdings denominated in the exchange’s native asset FTX Token (FTT).
Fears that FTX could become insolvent were compounded by questions on whether FTX’s trading arm Alameda Research made things worse by utilizing the token as collateral for loans.
Zhao says there are two major lessons that other players in the industry can learn from the fallout.
“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.”
Zhao says Binance has never used BNB for collateral and has never taken on debt.
In the near-term, Zhao says Binance will release a full, blockchain-verified breakdown of its reserves to let the public know the health of the world’s largest crypto exchange by volume.
“All crypto exchanges should do merkle-tree proof-of-reserves. Banks run on fractional reserves. Crypto exchanges should not. Binance will start to do proof-of-reserves soon. Full transparency.”
The collapse of FTX triggered massive volatility and a breakdown in the crypto markets.
At time of publishing, Bitcoin (BTC) is down 9.6% in the last 24-hours, at $18,606.
Ethereum (ETH) is down 14.8% at $1,328.
FTX Token (FTT) has plummeted 75% and now stands at $5.28.
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Featured Image: Shutterstock/Pavel Chagochkin