Changpeng Zhao: Cryptocurrency exchanges must comply with six main security rules

The CEO of the Binance exchange shared the principles he believes should help centralized cryptocurrency trading platforms avoid default.

Changpeng Zhao said he is working to implement these rules on his exchange.

• First of all, crypto exchanges should use their assets, and not the capital of users, for collateral in various projects. How did the FTX exchange.

• Exchanges must not use their own token as collateral. Since native tokens provide the backbone of an exchange’s blockchain ecosystem, they should not be deployed elsewhere. After all, it was the fears about the FTT token that became the catalyst for the collapse of FTX.

• Disclosure and actual confirmation of the existence of assets or reserves should be mandatory. Binance has stated that it is working on a so-called Merkle tree to prove the availability of funds. It should be presented to the community in the next few weeks. On November 10, the company shared information about the reserves, however, they were heavily refocused on their own stablecoin BUSD and the native BNB token.

• Exchanges are required to have a reliable reserve to protect users in the event of an emergency. Binance’s User Asset Protection Fund (SAFU) is currently the largest in the industry at $1 billion.

• Avoid excessive leverage. In 2022, this led to the collapse of many crypto lending platforms offering highly leveraged products to inexperienced retail traders on highly volatile assets.

• Strengthening and enforcing security protocols is key to transparency. All exchanges must abide by strict Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, Zhao made it clear.

Analysts at Cumberland DRW believe that the collapse of the FTX crypto exchange affected the structure of the crypto market, and now assets and capital will not be placed on centralized exchanges.