Binance CEO denies providing line of credit to 3AC after failure

Binance CEO Changepeng Zhao (CZ) said his exchange was not the primary trading venue for failing hedge fund Three Arrows Capital (3AC). He also did not give credit lines to the bailout fund.

Types of bailouts

As tweeted by Wu Blockchain on Wednesday, the South China Morning Post reports that many struggling companies have recently approached Binance with similar loan requests. CZ did not give further details at the time.

However, a blog post from the CEO on Thursday explored the ethics of bailouts, leverage and the role of the stock market in today’s fragile environment.

“We also have a responsibility to help industry players survive and hopefully thrive,” the statement read. “This is the case even if there are no direct benefits for us or if we experience negative returns on investment.”

As the executive explains, some companies don’t deserve to be bailed out. These include those that are poorly designed, poorly managed, or poorly operated – in other words, “bad” projects inflated by creative marketing and Ponzi schemes. On the contrary, consumer education is “the best protection” against such projects

On the other hand, projects that make “small mistakes” but otherwise have strong business models and good teams may otherwise deserve a bailout.

Finally, there are those “big projects” that barely hold up. Due to the shortage of cash, they can either wait for a cash injection or explore acquisition opportunities.

Many struggling companies have approached Binance in recent weeks – all claiming to be in the third category. This forced Binance to look at all of them carefully and start making nuanced decisions for each. “There is some subjectivity,” CZ said.

Leverage: fast and slow

The CEO also touched on the subject of leverage, whereby companies take out loans using cryptocurrency as collateral, often with the aim of multiplying their position.

Leverage was at the heart of the market meltdown in June, as several lending platforms saw their riskier lending positions approach liquidation while their crypto collateral collapsed.

Celsius, for example, was forced to suspend all withdrawals from the platform indefinitely as it raised cash to refinance its loan. Babel Finance was forced into a similar position soon after due to its involvement with 3AC, which also took on several subprime loans.

CZ distinguishes between two types of leverage within the crypto ecosystem: fast and slow.

Quick leverage is often associated with futures products traded on centralized exchanges. If there is some kind of liquidation cascade, it tends to start and end very quickly with this leverage. For example, on March 12, 2020, Bitcoin went from $8,000 to $3,000 in a single day due to this leverage, but quickly recovered.

On the other hand, today’s market seems to be plagued by slow leverage – where funds lend to other funds and challenge protocols to invest. The cascading effect of this leverage can often spread much slower, while taking longer for struggling platforms to admit.

“I think we haven’t seen the end of it yet,” CZ concluded.

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