New loan program from Binance has a loophole by trading tether for BNB

Last month, Binance added a new service to the already extensive range: Margin Trading. To complement this service, Binance has now also developed a credit service called Binance Lending.

Lending should actually deliver something

These complement each other well because Binance Lending allows users to lend BNB, ETC and USDT to Binance, while you can borrow money from Marging Trading to speculate on the exchange rate.

Financial institutions that offer both products (to the extent that they are already allowed) ensure that these two products do not interfere with each other. And they make sure that it does not cost money, but yields. To be profitable, the interest for a loan from a financial institution must be higher than when you lend money to the same institution. But Binance is disruptive, they take a completely different approach and will reinvent the wheel.

How does this work?

Whether that is smart is a second because reinventing that wheel is not in Binance’s favor. Smart traders have found a loophole through which they could borrow from Binance at a lower interest rate and lend it back to Binance at a higher interest rate. Let’s see how they do that:

Binance currently offers users three possible cryptocurrency to borrow: Binance Coin (BNB), Tether (USDT) and Ethereum Classic (ETC). These have an annualized interest rate of fifteen, ten and seven percent respectively.

Experienced traders should now ring a bell. What if you borrow USDT for ten percent and trade it for BNB on the market? Then you can lend that BNB back to Binance at fifteen percent. Count out your winnings (ok it’s five percentage points). The only risk you run is if the BNB market crashes.

Binance has limited the loan program. So they do not borrow infinitely many coins from the community. At present, the limit of the entire platform is 200,000 BNB, 5 million USDT and 20,000 ETC.

Way to pump BNB price?

Daniel Phillips of Beincrypto.com calculates that if the full amount of USD 5 million is lent to users, Binance for a period of 14 days (loan term) will earn $ 19,250. But are those tethers converted to BNB and loaned to Binance again? Then that costs the exchange $ 28,770. Daniel Philips:

The only way that this can be beneficial for Binance is if the BNB prices rise during every term of the loan. This has led to speculation that this is not really a loophole, but a strategy of Binance to pump the value of Binance Coin, and they are pretty good at it.