Binance CEO Suggests 6 Principles For Centralized Exchanges To Prevent FTX Fiasco

Irrespective of the analytical lens you choose, you might feel that the recent FTX debacle’s impact is heavier than other unfortunate past incidents, especially because it happened when the market was going through a bearish time.

Even though it has a smaller financial impact than those of the Mt.Gox exchange, the DAO hack, and the implosion of Terra, which fell into ruins in the industry’s history. The way how FTX misused its users’ funds and lied when provoked could lead to an uncomfortable effect on investors who are already cautious because of their security and stability concerns. 

Undoubtedly, cryptocurrency exchanges are the third vital part of the industry, as it acts as a guarantor between cryptos sellers and buyers; they must possess impregnable security protocols. The recent series of FTX collapse, abrupt liquidations, and exchange hacks probably prompts a set of actions that all crypto elite must carry out to retain their communities’ confidence and funds. 

Taking the initiative, Chanpeng Zhao, Binance’s CEO, recently came up with six principles that he believes should be adopted by all exchanges in order to thrive.

BNB’s price is currently hovering at $272. | Source: BNBUSD price chart from TradingView.com

Binance CEO’s Six Principles For Centralized Exchanges To Restore Integrity

In his blog published on Wednesday, Binance’s Founder and CEO, CZ, mentioned 6 principle steps he applies in managing his firm and urges other exchanges to incorporate these to maintain their integrity and trust within the community. In his opinion, the users’ funds’ safety should be the top priority of any firm and should not be spent for “illegal purposes.” He wrote:

In light of what happened last week, I felt compelled to extend these principles with the six most important requirements that Binance and all other centralized exchanges must adopt to ensure the trust of our users. We can’t let a few bad guys tarnish the reputation of this industry, which is still in its infancy.

He further added that exchanges must adopt a transparent transactional flow process with each other, including AML and KYC measures. Six measures suggested by Binance to fellow exchanges are as follows.  

1. Keep User Funds Risk-Free

Crypto exchanges must never execute risky transactions using the client’s funds. Therefore, exchanges should use preemptive awareness campaigns for the users at regular intervals, warning them about volatility trends.

2. Avoid Using Native Tokens As Collateral

Native tokens, created by the exchange company, play an essential part in the growth of its blockchain ecosystem. A strong blockchain token should have worthy use cases. Therefore, they should not be put as collateral, as it will diminish their demand inside the blockchain’s ecosystem.

3. Make Proof Of Assets Public

To instill the crypto environment transparently, crypto exchanges should work on developing more trust with their community by sharing information about key cold and hot wallet addresses. 

4. Build Strong Reserves

Similar to Binance’s SAFU fund, other major players in the industry should build shock-absorber reserves to use as a backup in times of need.

5. Avoid Excessive Leverage

The fifth suggestion Binance’s founder made to other exchanges is to become fiscally conservative. In his opinion, as the crypto sphere is highly volatile, it is unwise to take on debt for expansion.

6. Create A Standard Of Security Protocols

As the cryptocurrency industry is in the evolving phase, all elite players in the industry must play their part to make it safer for the community. Employing equivalent standards of quality security measures and projects, along with strict KYC and AML protocols, can go a long way.

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