In 2022, the crypto industry experienced several damaging events that significantly weakened trust in the digital asset ecosystem. Investors and stakeholders have been left reeling from the fallout, which ranged from centralized exchange failures to regulatory crackdowns.
In the wake of these challenges, many industry leaders are grappling with rebuilding trust in crypto. One entity taking bold steps towards this goal is the leading crypto exchange Binance.
Binance believes that improving trust and the security of crypto assets is crucial to accelerating the mainstream adoption that the industry has long been working for. The exchange strives to lead in this aspect, setting a clear example that other CEXs can follow.
As part of these transparency efforts, Binance recently published a new policy paper titled “Building Trust in the Crypto Ecosystem.” This policy paper introduces guidelines that detail how industry players and users can work together to improve trust, security, and safety in the crypto space.
The policy paper is also accompanied by a dedicated Building Trust page, where everyone can see how Binance implements the new measures. The company has dedicated this page to everything related to trust and transparency. Below are some steps Binance has taken to foster trust and transparency.
Transparency of Funds
The first major element of the policy paper is the safe handling of customer funds. Binance believes that centralized exchanges must adopt a new approach to the transparency of user funds to rebuild users’ trust.
Binance has adopted different proof of reserves (PoR) systems using two of the most secure and transparent cryptographic tools, Merkle Tree and Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs). This PoR system allows Binance users to verify their reserves while sensitive user information remains private.
Binance takes it further by disclosing its wallet addresses with each PoR snapshot. This increases users’ trust as they can view the reserves on the blockchain. To encourage the adoption of this PoR system, Binance has open-sourced the underlying code to allow other exchanges to use it and enhance their transparency.
Security
Binance prioritizes the safety of users’ assets and other sensitive user information obtained during the Know Your Customer (KYC) process. Hence, the exchange employs some of the most robust encryption methods to keep these safe.
Binance stores the majority of user funds in cold storage facilities. It also uses advanced security measures, including multi-signature and threshold signature schemes (TSS), to ensure the safety of users’ funds.
The exchange also believes that even the most secure systems can fail. As such, it created an emergency insurance fund that protects its users in the event of a security breach. The Secure Asset Fund for Users (SAFU) currently has a balance of $1 billion.
Transparency and Disclosure
Adequate transparency and disclosure are critical to fostering trust in the crypto industry. Trading platforms must enable users to verify that their assets are safely kept. Binance proposes using proof of reserves (PoR) disclosures built with innovative transparency solutions like zk-SNARKs and Merkel Tree – a technology that increases the efficiency and security of blockchain by encoding data in a systematic order for easy verification.
Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs) is a cryptographic proof that allows one to prove it possesses certain information without revealing the information. Since zk-SNARKs cannot be fabricated or manipulated, users can verify the safety of their assets on an exchange at any time.
Risk Management
Effective risk management is vital to retaining trust in an industry as volatile as crypto. Many companies collapsed last year due to unchecked leverage positions, over-collateralized loans, and inadequate protection funds.
Binance believes exchanges must ensure that loans are adequately collateralized and avoid taking on debt to fund expansion plans to prevent such incidents in the future. They must also ensure that tokens pass strict vetting processes before listing to protect users from investing in projects with low credibility and high risk while educating users on how the crypto market works. More importantly, exchanges must have user protection funds as a safety net to protect users in cases of security exploits and extreme bear markets.
Security of Users’ Funds
Binance ensures all user assets are backed 1:1 and protected by the highest wallet security standards. The platform recently upgraded its third-party self-custody solution, Trust Wallet, to include additional security features that ensure the safekeeping of users’ assets.
The exchange also refrains from using customers’ funds for any other purpose without the consent of users.
Proof of Reserves
Following the collapse of FTX, the then third-largest CEX in the market, Binance’s efforts to boost trust and transparency in the crypto industry took a major stride. The exchange published its first PoR disclosure, which relies on Merkle Tree, in November 2022.
In February 2023, Binance updated its PoR disclosure with zk-SNARKs, representing a significant improvement over the previous system. By disclosing its reserves, Binance allows its users to verify the safety of their assets at any point in time. A further update in March 2023 shows that Binance’s PoR disclosure has been updated to allow verification of user assets for a total of 24 tokens.
Strict Token Listing Requirements
Before any token is listed on the Binance platform, the projects must complete stringent requirements to determine their eligibility. This allows users to only invest in thoroughly vetted projects.
Binance SAFU
Binance prioritizes the protection of users’ assets. Hence, it has a Secure Asset Fund for Users (SAFU) fund that protects users in severe cases. Binance currently has about $1 billion in its SAFU.
