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Binance CEO shares ‘two big lessons’ after FTX’s liquidity crunch

Binance CEO Changpeng “CZ” Zhao has shared his take on “two big lessons” to be learned from the FTX saga, saying cryptocurrency firms shouldn’t use their own tokens as collateral and should also keep “large reserves.”

In a Nov. 8 tweet, Zhao laid out two learnings after the significant “liquidity crunch” at FTX which has ultimately resulted in a non-binding letter of intent from Binance to acquire the struggling exchange.

Zhao shared that his first lesson is to ensure a firm’s collateral should not consist of a token that it has created, and claims his exchange’s token — Binance Coin (BNB) — has never been used as collateral for its services.

FTX’s liquidity issues appeared to have come after a Nov. 6 tweet from Zhao saying Binance would be liquidating its holdings of FTX token (FTT) following “recent revelations” related to reported ties between FTX and the trading firm Alameda Research showing the firm had significant FTT holdings.

While Binance does not currently disclose proof of what reserves it uses as collateral, Zhao mentioned in a Nov. 8 tweet that in an effort to be fully transparent Binance will soon provide proof of reserves, adding:

“Banks run on fractional reserves. Crypto exchanges should not.”

Zhao’s second lesson from the downfall of FTX is that crypto businesses shouldn’t be borrowing, and instead should opt to maintain large reserves — which could be in reference to FTX users complaining of sluggish withdrawals on Nov. 7, sparking rumors the exchange didn’t have enough to cover user funds.

Related: Bitcoin price hits 2-week lows as FTX ‘bank run’ drains BTC reserves

Zhao’s tweet confirming Binance’s FTT holdings liquidation ended up triggering what some called a “bank-run” on the exchange, with analytics platform CryptoQuant data revealing that FTX’s Bitcoin (BTC) balance had fallen by 19,956 on Nov. 7 alone.

At the time of writing, FTT is down 75% in the last 24 hours, with the last price around $5.70 at the time of writing compared to its opening price of $22.14.

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