Changpeng Zhao: Six major commitments that a healthy centralized exchange should fulfill

On November 15, Binance CEO Zhao Changpeng shared six major commitments that a healthy centralized exchange should fulfill, which is the key to rebuilding trust in crypto exchanges under the influence of FTX's bankruptcy. Specifically, they include: avoiding user fund risks; never using native tokens as collateral; real-time proof of shared assets; maintaining strong reserves; avoiding excessive leverage; and strengthening and enforcing security protocols .

The following is the full text of the article:

A few weeks ago, I published the guiding principles behind my management style in response to questions about how Binance operates. I also recently mentioned that we would be working with partners to create an industry recovery fund to support healthy businesses that have been unfairly impacted by FTX’s apparent fraud. More on that soon.

In light of what happened last week, I feel it’s important to expand on these principles with the six most important requirements that Binance and all other centralized exchanges should adopt to ensure our users’ trust. We cannot allow a few bad actors to tarnish the reputation of this nascent industry.

Our top priority must be to protect our users. User funds must not be mismanaged and every effort must be made to ensure the safety of user funds. Exchange operations should be transparent and we know that Binance must lead by example.

The following six principles will help ensure centralized exchanges are safe for users. We encourage our peers to commit to doing so and are eager to engage in dialogue with the industry, regulators, and the community:

1. Avoid user fund risks

• User funds must never be traded or invested.
  

• We must proactively provide risk warnings to users so that they understand the volatility of cryptocurrencies.
  

2. Never use native tokens as collateral

• Native tokens are exchange tokens created by the company that operates the exchange
  

• Native tokens play an integral role in the operation of a blockchain and ensure a solid foundation for the blockchain. A healthy native token is the lifeblood of a blockchain’s success, and users need to be able to confidently rely on the native token that their chosen blockchain relies on.

• It also needs to have broad utility
  

1. One example is BNB Chain , a community-driven, decentralized, and censorship-resistant blockchain powered by BNB.
   

2. Liquidity: BNB’s automatic burning system continuously reduces its total supply to 100,000,000 BNB. This provides greater transparency and predictability by adjusting the amount of BNB to be burned based on the price of BNB and the number of blocks generated on the BNB Smart Chain (BSC).
   

3. Utility: Develop exciting dApps across a range of different verticals: Games, Social Dapps
   

3. Shared real-time asset proof

• As part of Binance’s ongoing commitment to transparency and fostering trust in the ecosystem, we have started sharing details of our major hot and cold wallet addresses.
  

• This is the starting point of our efforts to create a Merkle tree proof of funds, which we will share with the community in the coming weeks.
  

• Our goal is to enable platform users to make informed decisions that align with their financial goals.
  

• Other industry participants have already provided this transparency and we applaud their efforts, and now we call on the industry as a whole to do the same to ensure we can prove that a few bad apples do not represent the industry.
  

4. Maintain strong reserves

• We established the SAFU Fund to deal with extreme situations. Today, the fund has about $1 billion.
  

• Other players across the industry should aim to do similar things.
  

5. Avoid excessive leverage

• It is unwise to finance growth with debt.
  

• Cryptocurrency is too volatile — that’s why Binance’s capital structure is debt-free.
  

• We call on our industry partners to be similarly fiscally conservative.
  

6. Strengthen and enforce safety protocols

• Due to the rapidly evolving nature of the industry and project protocols, the industry needs to form better alliances to agree on quality standards for exchange and project security measures.
  

• Strong partnerships with law enforcement are needed to support investigations and recover stolen funds.
  

• We need a better incubation program to equip new projects with proper safety measures.
  

• To ensure greater clarity around the complex flows of assets on the blockchain, we must be prepared to invest in on-chain analytics to fix weaknesses in existing models. We must address these issues to ensure transparency.
  

• All exchanges should have strict KYC and AML measures in place.
  

We call on all other centralized exchanges to adopt these recommendations because we have a responsibility to our users who place their hard-earned money on our platforms and we have a duty to prove to regulators and the community that a few bad actors do not represent the entire industry.