The crypto industry appears to be increasingly turning to self-regulation as the regulatory net tightens around it – a trend that hasn’t escaped a major decentralised exchange either.
Sam Bankman-Fried, CEO of major crypto derivatives exchange FTX, announced that the exchange has decided to reduce the leverage that debt traders can use in margin trading from 100 to 20.
“An effective margin system is necessary for an efficient economic system,” he stated, adding, “However, everything has limits.”
Bankman-Fried continued by stating that margin systems must include a liquidation mechanism as a backup, but with the goal of “doing so infrequently.” At FTX, he says, “margin calls account for far less than a percent of volume,” in contrast to some platforms, where “margin calls account for up to 5% of volume” and some platforms have “removed data because it looked bad.”
Leveraged trading is a term that refers to borrowing funds in order to take a larger position than you could with your existing funds and thus potentially earn a higher profit. While margin trading enables traders to increase their returns, it can also result in increased losses and liquidations, which is why experienced traders typically advise novice traders to avoid leveraged trading.
The average leverage applied to FTX is approximately 2x. “And, while we believe that many of the arguments against high leverage are misguided, we also believe that it is not a necessary or healthy component of the crypto ecosystem.”
As a result, the CEO asserts, eliminating excessive leverage (more than 20 times) is a step in the direction the industry has been heading for some time.
Clara Medalie, research lead at Kaiko, a Paris-based provider of cryptocurrency market data, told The New York Times that “these liquidations are clearly a significant factor in the price crash” and that “it is a vicious cycle.”
The price collapse compelled the exchanges to liquidate the most highly leveraged investors’ trading positions – before their collateral became insufficient to cover their positions.
The leveraged offerings on FTX are more of a reputational risk as Bankman-Fried seeks to expand FTX’s global reach, according to Timothy Massad, former chairman of the Commodity Futures Trading Commission.
Additionally, another exchange appears to be responding to recent regulatory developments. Binance, a major cryptocurrency exchange, announced that its futures have already begun limiting new users to a maximum leverage of 20 times.
The move was made on July 19, according to CEO Changpeng Zhao, but the team “didn’t want to make this a thingy.”
“In the interest of consumer protection, we will gradually roll this out to existing users over the next few weeks,” Zhao explained.
After previously offering a maximum of 125 times, an investment of USD 1,000 on Binance can now be converted into a bet of up to USD 125,000.
All of this, and likely more, comes as regulatory pressure on the rapidly growing crypto industry from around the world, most notably the United States, intensifies. Binance, for instance, has been subject to regulatory scrutiny in a number of countries.
“It’s obvious that strict regulation is to be expected. Binance is in the process of transitioning from a technology startup to a financial services provider. We are stepping up our compliance efforts, including those of former regulators “Zhao stated during the REDeFiNE TOMORROW 2021 virtual summit.
Binance Margin announced today that it will remove AUD, EUR, and GBP cross and isolated margin pairs from its platform in August.
Uniswap is restricting access to the Uniswap Protocol to its own interface, stating that “this action has no effect on the Uniswap Interface code, which remains open-source, or the numerous other portals or locally-run instances that are used to access the Uniswap Protocol.”
Last Tuesday, US Securities and Exchange Commission (SEC) Chairman Gary Gensler suggested that stock tokens, whether on centralised or decentralised platforms, would need to be registered. “If these products are security-based swaps, the other rules I mentioned previously, such as the trade reporting rules, will apply,” he added, noting that the SEC has already brought several cases involving retail offerings of security-based swaps and “unfortunately, there may be more.”
Binance also announced last week that stock tokens are already unavailable for purchase on Binance.com and that the platform will discontinue support for such tokens as it shifts its “commercial focus to other product offerings.”
Regulations kicking in:
Meanwhile, some cryptocurrency exchanges, such as Coinbase, Kraken, and Gemini, have already increased their focus on compliance, attempting to avoid grey regulatory areas and leveraging it to their advantage.
“We’re playing the long game,” Cameron Winklevoss, founder of Gemini, recently told Bloomberg. “We’re vying to be the race’s fastest tortoise. The long game eventually pays off.”
Gemini’s parent company, Gemini Trust Co., also contributed to the formation of the Virtual Commodity Association, whose mission is to prevent fraud and manipulation, and which is “reminiscent of Wall Street’s self-regulatory groups.”
Meanwhile, Coinbase published audited financial statements and “bolstered” its compliance operations as it prepared to go public this year, while Kraken obtained a Wyoming regulated bank charter as it prepares to go public as well.
“The Catch-22 is that the cryptocurrency system was designed to circumvent large banks,” John Griffin, a finance professor at the University of Texas at Austin’s McCombs School of Business, was quoted as saying. Griffin continued, “rather than an autonomous universe free of government regulation, we now have crypto exchanges performing the functions of traditional exchanges and governments in traditional markets.”
Lets learn some fundamentals about cryptocurrencies:
What exactly is a cryptocurrency?
A cryptocurrency is a digital currency that was created using encryption algorithms. It is a form of alternative payment. Due to the use of encryption technologies, cryptocurrencies serve as both a medium of exchange and a virtual accounting system. A cryptocurrency wallet is required to use cryptocurrencies. These wallets can be either cloud-based services or software that is installed on your computer or mobile device. Wallets are the devices that store the encryption keys that verify your identity and connect you to your cryptocurrency.
What are the risks associated with cryptocurrency use?
Cryptocurrencies are still in their infancy, and their market is extremely volatile. Because cryptocurrencies are not regulated by banks or any other third party, they are typically uninsured and difficult to convert into a form of tangible currency (such as US dollars or euros.) Additionally, because cryptocurrencies are intangible technology assets, they, like any other intangible technology asset, can be hacked. Finally, because you store your cryptocurrencies in a digital wallet, you will lose your entire cryptocurrency investment if you lose your wallet (or access to it or to wallet backups).