In November 2022, Binance CEO Changpeng Zhao announced that his exchange would liquidate its FTT holdings. For starters, FTT is the native token of fallen cryptocurrency exchange FTX. Zhao’s announcement prompted other FTT holders to sell off their tokens, bringing FTX to its knees.
At the time, FTX encountered a bank run, with over $5 billion in user funds being withdrawn within a day. The exchange would later announce that it did not have enough liquidity to facilitate withdrawals. It was discovered that FTX’s sister company, Alameda Research, collateralized its loans using FTT.
Since then, exchange tokens have come under massive scrutiny. This article discusses everything you need to know about such tokens. You will learn their uses and the risks associated with them.
Exchange Tokens Explained
Exchange tokens are native to crypto exchanges and are created and issued by firms running those exchanges. They are also known as utility tokens since they have uses on exchanges.
The well-known exchange tokens are FTX’s FTT, OKX’s OKB, Crypto.com’s CRO, KuCoin’s KCS, and Binance’s BNB.
How Exchange Tokens Are Used
Cryptocurrency exchanges create tokens for multiple reasons, like incentivizing customers to participate in staking, covering transaction fees, raising capital, and giving holders the right to vote on various proposals.
At Binance, BNB is used to fuel transactions on the exchange’s network BNB Chain, and it also serves as a governance token, allowing holders to raise and vote on proposals.
At KuCoin, KCS holders pay discounted trading fees. Per KuCoin’s blog post, the discount you receive depends on the quantity of KCS tokens you hold. Moreover, the crypto exchange says holders of its native token can use the asset to pay transaction costs.
Meanwhile, holders of CRO enjoy cheaper trading fees on Crypto.com. In addition, they receive discounts when paying for products using the exchange’s credit cards.
How to Buy Exchange Tokens
The simplest way to buy an exchange token is through its parent trading platform. However, some of these tokens are listed on other exchanges. For example, besides Binance, you can find BNB on KuCoin, OKX, Bitmart, BYDFi, Bybit, and many more.
If the trading platform you wish to purchase an exchange token does not have a fiat onramp, you will need to use USDT, Ethereum, or Bitcoin to buy the asset. Note that before you can buy any exchange token, you must set up a trading account and verify it by completing the know-your-customer process.
It is worth mentioning that some exchanges have blocked users in certain countries from buying their tokens. For instance, FTX does not allow United States customers to buy FTT.
Risks Associated With Exchange Tokens
It is difficult to notice the risks that exchange tokens carry at first. As in the case of FTX, the exchange appeared to be an industry leader, so buying FTT seemed like a good investment idea. However, when we consider the number of FTT tokens held by Binance, that is where the risk reveals itself.
Before FTX collapsed, Binance was holding over 23 million FTT tokens, estimated to be worth around $530 million. Binance got those tokens after investing in FTX back in 2019. When Zhao’s exchange announced its plans to liquidate its FTT holding after discovering a liquidity crisis in FTX, FTT’s price plunged 85%, putting most investors in massive losses.
Counterparty risk is another risk associated with buying exchange tokens. It occurs when a token is not backed by any real-world asset. So when an exchange token’s liquidity dries up, and the exchange issuing it does not have reserves to back it, investors will end up holding valueless tokens.
Moreover, there is also a risk that comes with staking exchange tokens. For example, if you stake your KCS tokens, you cannot transfer or trade them. So, in the event KuCoin is exploited or files for bankruptcy, there is a likelihood you will lose your KCS.
SureTradeGroup.com is not responsible for the content, accuracy, quality, advertising, products or any other content posted on the site. Some of the content on this site is paid content that is not written or posted by our writers or editors and the opinions expressed do not reflect the opinions of this website. Any disagreement you may have with brands or companies mentioned in articles will need to be taken care of directly with those specific brands and companies. The responsibility of anyone who may click links in our articles and ultimately sign up for that product or service is their own. Forex, Stocks, Cryptocurrencies, NFTs and Dogital Tokens are all a high-risk asset, investing in them can lead to losses. Readers should do their own research before taking any action.