‘Two big lessons’ shared by Binance CEO after FTX’s liquidity crunch
CZ took to Twitter on November 8 to share “two big lessons” that crypto firms should take in the aftermath of FTX’s demise.
Binance CEO Changpeng “CZ” Zhao has given his thoughts on the “two important lessons” to be drawn from the FTX incident, stating that cryptocurrency firms should not utilise their own tokens as collateral and should have “huge reserves.”
In a Nov. 8 tweet, Zhao outlined two lessons learned following the huge “liquidity crunch” at FTX, which resulted in Binance’s non-binding letter of intent to acquire the struggling exchange.
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
Zhao stated that his first lesson is that a firm’s collateral should not consist of a token generated by the firm, and that his exchange’s token, Binance Coin, has never been used as collateral for its services.
The liquidity issues with FTX appeared to have occurred following a tweet from Zhao on Nov. 6 stating that Binance would be liquidating its holdings of the FTX token due to “recent revelations” related to reported ties between FTX and the trading firm Alameda Research, which revealed the firm had significant FTT holdings.
While Binance does not currently disclose what reserves it utilises as collateral, Zhao stated in a Nov. 8 tweet that Binance will soon publish proof of reserves in order to be totally transparent, adding:
“Banks run on fractional reserves. Crypto exchanges should not.”
Zhao’s second takeaway from FTX’s demise is that crypto firms should avoid borrowing and instead keep substantial reserves — which could be in reference to FTX users complaining about slow withdrawals on Nov. 7, generating concerns the exchange didn’t have enough to cover user payments.
Zhao’s tweet confirming Binance’s FTT holdings liquidation triggered a “bank-run” on the exchange, with analytics site CryptoQuant data revealing that FTX’s Bitcoin balance had dropped by 19,956 on Nov. 7 alone.
FTT is down 75% in the last 24 hours at the time of writing, with the last price around $5.70 compared to its opening price of $22.14.