Exchanges

Binance is preparing to offer margin — even as regulators around the globe crack down on the practice

Quick Take

  • Binance is the world’s biggest crypto exchange
  • It is preparing to offer margin to clients, sources tell The Block
  • Regulators are cracking down on margin crypto trading
  • So this could be a regulatory risk for Binance, but it could also position them to entrench the market further

Cryptocurrency trading is nothing if not risky, and one exchange in the spine-tingling volatile digital asset market is looking to support a trading feature that’ll make it riskier.

Binance, one of the largest exchanges in the market, facilitates the trading of over 100 coins and tokens for a client base largely composed of retail investors. Now, the firm is preparing to offer margin to those traders, according to sources close to the situation. That is to say, the firm will allow users to borrow money to trade, a bold move as some regulators around the world are looking to ban or implement stricter rules around the practice.

A spokeswoman for Binance did not respond to messages seeking comment. To be clear, the firm is in the early stages of supporting margin and it might not fully roll out for months. Internally, there have been talks about requiring BNB, Binance’s native token, to stake in order to unlock margin.

Margin trading, essentially, is trading with borrowed money. In U.S. equities, a broker offers a client the ability to trade on margin in order to increase their buying power. Still, it comes with risk. “The downside to using margin is that if the stock price decreases, substantial losses can mount quickly,” as the Securities and Exchange Commission notes in a nifty explainer on the subject. The losses can be more than what you originally invested due to the leverage applied. 

In U.S. equities, rules around margin trading are well established to protect consumers from the risks associated with it. Furthermore, brokers have their own rules and standards on top of those set forth by agencies such as FINRA, which requires a trader to deposit a minimum margin amount, for instance. In crypto markets, which aren’t for the faint of heart, the risk of trading on margin is amplified, experts tell The Block.

“There’s higher risk in these unregulated markets because of the lack of regulation,” one source said. “And then layer in the fact that the assets themselves are functionally unregulated in that marketplace, price manipulation continues.” That could allow exchanges to trade against their leveraged clients, the source added.

Brad Koeppen, head of trading at crypto trading firm CMT Digital and a former trader on the floor of Cboe, told The Block in an interview that his firm trades on margin, but it is careful about engaging in the practice. “When we are putting on a position we generally do not want the exchange —they will liquidate for you,” he said. “We don’t want to leave it up to them.”

And some times they’re not very transparent either, he added. “There’s a reason for [regulators] to be concerned about leverage. If you invest $1,000 the most you can lose is $1,000, but once you add leverage to that, you can lose more. And the risk is greater than some people probably understand.” Still, regulators aren’t necessarily concerned about firms like CMT Digital. They’re concerned about mom-and-pop day traders.

“I think in general a lot of these regulations that read like these are tied to consumer protection type concerns,” Koeppen said, referring to a proposal by Canadian regulators to ban crypto margin trading temporarily and recent news out of Japan that its regulators would implement stricter rules on crypto margin trading, requiring exchanges to register to offer the service. “This has more to do about the exchanges themselves than crypto,” said Jeff Dorman, CIO of Arca. “Charles Schwab and other retail brokers have very stringent procedures to open up a margin account. If you are trying to do options, they’re going to grill you to make sure you know what you’re doing.”

So what does this mean for Binance? To be clear, the firm wouldn’t be alone in extending margin to its clients. Other exchanges including Kraken, Bitfinex, and most notably futures platform BitMEX offer margin and other forms of leverage to traders as well. Still, Binance caters to a massive retail audience and offering those types of inexperienced traders such capabilities could raise the concerns of regulators. When it comes to regulating cryptocurrencies, to-date, regulators have largely been concerned with consumer protection.

However, Binance has mastered the art of regulatory arbitrage, successfully circumventing regulatory burdens in the past as they’ve moved from jurisdiction to jurisdiction. Data from The Block shows that during the current cryptocurrency bear market, the firm has gained significant market share relative to other players through aggressive expansion and novel offerings such as their newly launched issuance platform, Binance Launchpad.

Indeed, by launching a full-stack product, Binance could further stand out in a crowded industry as the one-stop shop for both institutional and retail traders. Margin functionality is an essential part of this transition.

“Offering more services makes the gap between Binance and the rest of the market even larger,” Dorman said.

Still, there are those regulatory risks. 

“Any trading activity that is confusing, insufficiently explained or hyper-predatory is bound to leave unhappy customers, who may complain to regulators,” a source said.