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Six Commitments for Healthy Centralized Exchanges

2022-11-15

Steps to restore trust.

A few weeks ago, I published the guiding principles behind my style of management to answer questions about how I run Binance. I’ve also recently mentioned that we’ll be working with partners to create an industry recovery fund to support otherwise healthy businesses that have been unfairly impacted by FTX’s apparent fraud. More to come on that soon. 

In light of what happened last week, I felt compelled to expand upon these principles with the six most important requirements that Binance and every other centralized exchange should adopt in order to ensure trust with our users. We cannot let a few bad actors sully the reputation of this industry when it's still in its infancy. 

Our role, first and foremost, must be to protect users. User funds must never be mismanaged and all measures must be maintained to keep user funds secure. Exchange operations should be transparent and we know Binance must lead by example. 

Here are six principles that help to keep centralized exchanges safe and secure for users. We encourage our peers in the industry to commit to doing the same and are eager to have this dialogue with industry, regulators and the community:

  1. Be risk averse with user funds

  • User funds must never be traded or invested.

  • We must provide risk warnings proactively for users so they understand the volatility across crypto.

  1. Never use native tokens as collateral

  • Native tokens are exchange tokens that are created by the company that runs the exchange 

  • Native tokens play an integral role in the running of blockchains and ensures the strong foundations for blockchain 

    • A healthy native token is the lifeblood of a successful blockchain. 

    • Users need to be able to confidently depend on the native token their chosen blockchain relies on. 

  • There also needs to be widespread utility.

    • An example is BNB chain which is a community-driven, decentralized and censorship-resistant blockchain, powered by BNB. 

    • Liquidity: BNB’s auto-burn system continues to consistently reduce its total supply to 100,000,000 BNB. Done to provide greater transparency and predictability by adjusting the amount of BNB to be burned based on BNB’s price and # of blocks generated on BNB Smart Chain (BSC) 

    • Utility: develop exciting dApps in a range of different verticals: games, social decentralized applications

  1. Share live proof of assets

  • As part of Binance’s ongoing commitment to transparency and fostering trust in the ecosystem, we have begun sharing details of key hot and cold wallet addresses.

  • This is a starting point while we work to create a Merkle tree proof of funds that we will share with the community in the next few weeks. 

  • Our objective is to allow users of our platform to make informed decisions that are aligned with their financial goals.

  • Other industry players have been providing this transparency already and we commend them for that effort and now we call on the whole industry to do the same to ensure that we can demonstrate that a few bad apples do not represent this industry.

  1. Keep strong reserves

  • We established the SAFU fund to cover extreme circumstances. Today, there is about $1b in the fund.

  • Others across the industry should commit to doing something similar.

  1. Avoid excessive leverage

  • It is unwise to take on debt to fund growth. 

  • There is simply too much volatility in crypto - that’s why Binance’s capital structure is debt free. 

  • We call on our industry partners to be equally fiscally conservative. 

  1. Strengthen & Enforce Security Protocols 

  • Due to the fast evolving nature of industry and project protocols, there is a need for industry to form a better coalition to agree on standards for the quality of security measures for exchanges and projects

  • Strong partnership with law enforcement is required to support investigations and recovery of stolen funds. 

  • We need a better incubation program to equip new projects with appropriate security measures 

  • To ensure greater clarity of the complex flow of assets across the blockchain, we have to be prepared to make investments in on-chain analysis to fix weaknesses in existing models. We must address them to ensure transparency.

  • All exchanges should have strict KYC and AML measures in place

We call on all other centralized exchanges to adopt these proposals, because we all have a responsibility to the people that decide to invest their hard earned money with us. The onus is on us to prove to regulators and the community that a few bad actors are not emblematic of this industry.

I am of course open to a discussion on these principles and welcome input from across the industry. Feel free to reach out to me via Twitter.