Main conclusions
We are now witnessing an inflection point in the digital asset space. Restoring user and regulatory trust in cryptocurrency platforms will be critical to the future of the entire industry, which is still in its early stages.
Key industry players like centralized crypto exchanges (CEXs) must make efforts to prevent malicious actors from tarnishing the reputation of the digital asset ecosystem.
In an effort to lead by example, Binance has formulated a practical guide for centralized cryptocurrency exchanges to increase public trust in the crypto ecosystem.
Digital assets have enormous potential to bring financial freedom and improve people's lives by offering a model for fairer, more transparent and efficient transfer of information and funds online. However, the cryptocurrency space is still in its infancy and we must proceed with extreme caution as more people join this innovative space and trust it with their money. The events of the past year have shaken the crypto ecosystem and proven the critical importance of trust and security.
Responsibility to restore trust
Restoring user and regulatory trust in cryptocurrency platforms will be critical to the future of the entire industry. To a large extent, it is centralized crypto exchanges that act as the face of the cryptocurrency industry in the eyes of the public and politicians. Accordingly, the requirements for transparency and security of these platforms will now be even more stringent than for traditional financial institutions.
Centralized exchanges, along with others in the digital industry, must demonstrate that a few bad actors do not define the entire cryptocurrency space. Regaining the trust of politicians, governments and society can only be achieved by prioritizing risk management, transparency and security. As the largest crypto exchange by trading volume in the world, Binance recognizes its responsibility to the digital asset space and is committed to leading by example.
To this end, the platform has presented a practical guide to creating a secure, trust-based crypto ecosystem. We all need to work hard on this—no one industry player can accomplish this task alone. For the sustainable development of the crypto ecosystem, all centralized exchanges and other companies working with the blockchain must understand and accept this responsibility. Below are the key trust-building factors that platforms should consider, as well as specific recommendations for each.
Components of trust
Client Asset Management
The main task of cryptocurrency service providers is to protect user funds. Assets must only be used in the manner for which the client has given their express permission.
Exchanges should allow users to decide where and how to store digital assets. The processes of depositing and withdrawing funds from the exchange should be simple, cost-effective and user-friendly. Data storage solutions used by exchanges must meet the highest security standards and protect user assets from malicious attacks.
On Binance, assets are backed by reserves in a 1:1 ratio and are never used without the user's permission. In addition, we provide the highest level of security and take care of the safety of funds in wallets.
Transparency of user funds
A key condition for trust is transparency of user funds. Clients who trust us with their money have every right to verify the safety of their assets on a centralized exchange at any time through PoR or a similar information disclosure system. Regardless of the method, it must meet technical requirements, be understandable, and be regularly checked and updated.
Binance places the utmost importance on the security of user funds. In November 2022, we built and implemented a Merkle tree-based reserve verification system through which users can verify their assets stored on our platform. In February 2023, Binance enhanced its core fund transparency solution by introducing zk-SNARK, a type of zero-knowledge proof. By combining zero-knowledge proof and Merkle tree information, we offer users an innovative way to verify the status of Binance reserves while ensuring privacy and security. Anyone can verify that the total net balance of each account is non-negative and all user assets are included in the total net balance of users' assets reported by the Binance platform.
Management of risks
As with any organization that handles customer funds, centralized cryptocurrency exchanges use common sense. The risks of using debt to raise funding may be exacerbated by the volatility of digital assets, so companies in this space should take a conservative approach to capital structuring. Binance believes that it is unwise to take on debt to increase funding, so Binance's capital structure does not include debt.
If any CEX offers wrapped tokens for use on another blockchain, then the assets must always be backed 1:1 on the native chain, and users must be able to verify that this is indeed the case. Binance offers a range of wrapped tokens for use on various chains such as BTCB and BBTC. Our wrapped tokens are always backed in a 1 to 1 ratio, and anyone can verify this.
Low-quality crypto projects whose main goal is to promote their tokens to a major exchange can also pose a risk to the clients of these platforms. Centralized exchanges are responsible for strictly vetting crypto assets before allowing them to trade on their platforms to protect users. Binance applies strict verification protocols before adding new assets. For example, out of 450 projects that applied to Binance Launchpad and Launchpool in the first half of 2022, only 5 achieved listing of their tokens.
Centralized exchanges must implement the necessary security measures to protect users from unforeseen circumstances that could lead to the loss of funds. To achieve this, Binance maintains a $1 billion Safe Asset Fund for Users (SAFU).
Ultimately, the best way to protect your digital assets is to learn how to manage risk. All exchanges must dedicate resources to providing customers (as well as the broader community, including regulators, law enforcement, and policymakers) with comprehensive information about their products, services, and the industry as a whole. Educational materials should provide detailed information about the risks inherent in various products, promoting responsible trading. An example of such a resource is Binance Academy, a blockchain and cryptocurrency learning portal that hosts free courses and educational materials in more than 25 languages, including nearly 400 articles, as well as educational videos on various topics. Binance Academy launched its first online course in November 2022 and plans to continue releasing more courses in the future.
Joint efforts
Our goal can only be achieved through joint efforts. By following these recommendations, platforms will be able to ensure asset security for all participants in the digital space. The more blockchain platforms accept responsibility and begin to provide the necessary level of transparency, the more trust they will gain. We encourage projects in the Web3 space to join us in creating an ecosystem built on the principles of security and trust.
Additional Information
Building Trust in the Crypto Ecosystem: Policy Document
What is PoR information?
Increasing transparency of cryptocurrencies through zero-knowledge proof
How Zk-Snark Algorithms Improve Binance's Asset Custody Information System