Binance CEO Changpeng Zhao (CZ) has said that his exchange was not the primary trading venue for faltering hedge fund Three Arrows Capital (3AC). It did not extend any line of credit to the fund for the bailout.
types of bailouts
as tweeted By Wu Blockchain on Wednesday, the South China Morning Post reported that several troubled firms have recently approached Binance with similar requests for loans. CZ did not elaborate further at the time.
However, a blog post from the CEO on Thursday explored the ethics of bailouts, leverage and the role of exchanges in today’s volatile environment.
“We also have a responsibility to help industry players survive and hopefully grow,” the statement said. “This is the case even if we have no direct benefit or we experience negative ROI.”
As the executive points out, there are some companies that don’t deserve the bailout. These include those that are poorly designed, poorly managed, or poorly operated – in other words, projects “bad” by creative marketing and Ponzi schemes. Rather, consumer education is the “best protection” against such projects.
On the other hand, projects that make “small mistakes” but otherwise have sound business models and good teams may otherwise deserve a bailout.
In the end, they are “great projects” that are hard to catch up with. Due to the cash crunch, they can either wait for the cash injection or explore acquisition possibilities.
Several troubled companies have approached Binance in recent weeks – all claiming to be in the third category. This forced Binance to carefully examine them all and make nuanced decisions for each. “There’s some subjectivity to it,” CZ said.
Leverage: fast and slow
The CEO also tackled the topic of leverage, whereby companies often take out loans using cryptocurrency as collateral to multiply their positions.
Leverage was the focus of June’s market slump, as several lending platforms saw their riskier loan positions approaching liquidation while their crypto collateral tanked in value.
For example, Celsius was forced to indefinitely halt all withdrawals from the platform as it gained liquidity to refinance its debt. The involvement with 3AC forced Babel Finance into a similar position shortly afterwards, which also took on a number of riskier loans.
CZ differentiates between two types of leverage within the crypto ecosystem: fast and slow.
Rapid leverage is often associated with trading futures products on centralized exchanges. If there is any kind of liquidation cascade, it starts and ends very quickly with this leverage. For example, on March 12, 2020, this leverage caused bitcoin to drop from $8000 to $3,000 in a single day, but quickly recovered.
On the other hand, today’s market seems to be plagued by this. slow Leverage – where funds lend to other funds and the Diffie protocol to invest. The wider impact of this leverage can often spread more slowly, while taking longer to be accepted by troubled platforms.
“I believe we haven’t seen the end of these yet,” CZ concluded.
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