Changpeng Zhao explained his philosophy on which companies deserve help and which should be left behind.
Binance CEO Changpeng Zhao (Czech Republic) said that his exchange was not the primary trading venue for the unsustainable hedge fund Three Arrows Capital (3AC). He also did not provide the fund with lines of credit for financial assistance.
Types of bailouts.
As Wu Blockchain reported Wednesday, the South China Morning Post reports that many troubled firms recently approached Binance with similar requests for credit. CZ did not specify details at the time.
Nevertheless, the CEO’s blog post Thursday explored the ethics of the bailout, leverage and the exchange’s role in today’s shaky environment.
“We also have a responsibility to help industry players survive and hopefully thrive,” the statement said. “That’s true even if there is no direct benefit to us or we get a negative return on investment.”
As the executive explains, there are some companies that don’t deserve help. These include those that are poorly designed, poorly managed or poorly operated — in other words, “bad” projects bloated with creative marketing and Ponzi schemes. Rather, consumer education is the “best defense” against such projects.
On the other hand, projects that make “small mistakes” but otherwise have solid business models and good teams may otherwise deserve financial assistance.
Finally, there are those “great projects” that are barely hanging on. Because of cash shortages, they can either wait for a cash infusion or explore acquisition opportunities.
In recent weeks, many troubled companies have approached Binance-all expectedly claiming to be in the third category. This has led Binance to scrutinize them all and start making detailed decisions about each one. “There’s some subjectivity in that,” ChZ said.
Leverage: fast and slow
The CEO also touched on the topic of leverage, where companies take out loans using cryptocurrency as collateral, often to multiply their position.
Leverage played a key role in the June market crash, as several lending platforms saw their riskier credit positions approach liquidation and their cryptocurrency collateral plummet in value.
Celsius, for example, was forced to indefinitely suspend all withdrawals from the platform as it received liquidity to refinance its loan. Shortly thereafter, Babel Finance was forced to take a similar stance because of its involvement with 3AC, which was also taking out several risky loans.
CZ distinguishes between two types of leverage in the crypto ecosystem: fast and slow.
Fast leverage is often associated with trading futures products on centralized exchanges. If there is any liquidation cascade, it tends to start and end very quickly with that leverage. For example, on March 12, 2020, bitcoin collapsed from $8,000 to $3,000 in one day because of this leverage, but quickly recovered.
On the other hand, today’s market seems to suffer from slow leverage, with funds lending other funds and defi protocols to invest. The cascading effect of this leverage can often spread much more slowly, and troubled platforms also need more time to recognize it.
“I believe we haven’t seen the end of them yet,” CZ concluded.