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Binance CEO Changepeng Zhao (CZ) has stated that his exchange was not the primary trading venue for the faltering hedge fund Three Arrows Capital (3AC). It also did not extend any lines of credit to the fund for a bailout.
The Types of Bailouts
As tweeted by Wu Blockchain on Wednesday, the South China Morning Post reports that many 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 exchange’s role in today’s shaky environment.
“We also have a responsibility to help industry players survive and hopefully thrive,” reads the statement. “This is the case even if there are no direct benefits to us or we experience negative ROIs.”
As the executive explains, there are some companies that don’t deserve bailouts. These include those that are poorly designed, poorly managed, or poorly operated – in other words, “bad” projects inflated 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.
Finally, there are those “great projects” that are barely holding on. Due to being tight on cash, they may either wait for a cash injection or explore acquisition possibilities.
Many troubled companies approached Binance in recent weeks – all expectedly claiming to be in the third category. This forced Binance to carefully examine them all and begin making nuanced decisions for each. “There is some subjectiveness to it,” said CZ.
Leverage: Fast and Slow
The CEO also tackled the topic of leverage, whereby companies take out loans using cryptocurrency as collateral, often in order to multiply their position.
Leverage was central to June’s market meltdown, as multiple lending platforms saw their riskier loan positions approach liquidation while their crypto collateral tanked in value.
Celsius, for instance, was forced to indefinitely pause all withdrawals from the platform as it sourced liquidity to refinance its loan. Babel Finance was forced into a similar position shortly afterward due to its involvement with 3AC, which also took on multiple risky loans.
CZ draws a distinction between two types of leverage within the crypto ecosystem: Fast, and slow.
Fast leverage is often related to futures products trading on centralized exchanges. If there’s any kind of liquidation cascade, it tends to begin and end very quickly with this leverage. For example, on March 12th, 2020, Bitcoin crashed from $8000 to $3000 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 defi protocols to invest. The cascading effect of this leverage can often spread much more slowly, while also taking longer to admit to by troubled platforms.
“I believe we have not seen the end of these yet,” concluded CZ.