In light of what has been happening in the crypto ecosystem in the last week, Binance Chief Executive Officer, Changpeng Zhao (CZ), has reiterated the need to focus on rebuilding and safeguarding users.
In a statement addressed to the crypto community, published on Tuesday, November 15th, 2022, CZ outlines the six most important requirements that the exchange and every other centralized exchange should adopt in order to ensure trust with users. He explains that “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.”
Below are the six principles that CZ outlines which help to keep centralized exchanges safe and secure for users:
1. Be risk averse with user funds
a. User funds must never be traded or invested.
b. We must provide risk warnings proactively for users so they understand the volatility across crypto.
2. Never use native tokens as collateral
a. Native tokens are exchange tokens that are created by the company that runs the exchange.
b. Native tokens play an integral role in the running of blockchains and ensures the strong foundations for blockchain
c. A healthy native token is the lifeblood of a successful blockchain.
d. Users need to be able to confidently depend on the native token their chosen blockchain relies on.
e. There also needs to be widespread utility – an example is the BNB chain which is a community-driven, decentralized and censorship-resistant blockchain, powered by BNB.
3. Share live proof of assets
a. 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.
b. 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.
c. Our objective is to allow users of our platform to make informed decisions that are aligned with their financial goals.
4. Keep strong reserves
a. We established the SAFU fund to cover extreme circumstances. Today, there is about US$1billion in the fund.
b. Others across the industry should commit to doing something similar.
5. Avoid excessive leverage
a. It is unwise to take on debt to fund growth.
b. We call on our industry partners to be equally fiscally conservative.
6. Strengthen & Enforce Security Protocols
a. 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.
b. Strong partnership with law enforcement is required to support investigations and recovery of stolen funds.
c. We need a better incubation program to equip new projects with appropriate security measures.
d. 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.
e. All exchanges should have strict KYC and AML measures in place
Overall, every exchange has a responsibility to the people who decide to invest with them. Thus, CZ emphasizes the importance of all centralized exchanges adopting the above stated principles to protect users. Ultimately, the onus is on the crypto exchanges to prove to regulators and the community that a few bad actors are not emblematic of the industry.