The move comes after some analysts alleged that high-risk, debt-based trades were the cause of a trillion dollar crypto crash in May.
Cryptocurrency exchanges FTX and Binance have placed limits on the extent of risk users may take on in certain kinds of trades.
Both companies will limit customers to 20 times leverage when purchasing futures contracts. This means when users of the exchanges wish to borrow to make bets on the future price of cryptocurrencies, they must deposit at least one-twentieth of the value of the bet upfront. Previously, FTX allowed users to leverage up to 101 times, and Binance as much as 125 times.
FTX founder Sam Bankman-Fried tweeted on Sunday (25 July) that the company was “removing high leverage from FTX”. He added that it would take “the first step here: a step in the direction the industry is headed, and has been headed for a while”.
Several hours later, Binance founder Changpeng Zhao said his company had been limiting new users’ leverage since 19 July, but “didn’t want to make this a thingy”. He went on: “In the interest of consumer protection, we will apply this to existing users progressively over the next few weeks.” Binance is also ceasing all margin trading against the euro, pound sterling and Australian dollar.
In an interview published in the New York Times last week, Bankman-Fried said that most of FTX’s customers were trading in futures contracts rather than buying and selling actual bitcoin or other cryptocurrencies. Futures have been a feature of commodities trading since the 17th century and stock trading since the 1970s, but crypto futures debuted in 2017 on the Chicago Board Options Exchange.
Speculating on futures, as opposed to trading assets in the traditional way, can multiply both the potential reward and the potential risk for investors as leverage can be increased.
The market downturn was initially prompted by increasing regulation of cryptocurrencies in China and Tesla’s U-turn on bitcoin purchases. But analysts said holders of high-risk investments began automatically liquidating them in response to the movement of the market, causing prices to drop even further and cascading until many currencies were in free fall.
Bankman-Fried noted in his announcement of the new restriction that the average leverage used on FTX was approximately two times, and said that the move will “hit a tiny fraction of activity on the platform”.
Binance, by far the larger of the two exchanges, has come under increasing scrutiny from regulators across the globe in recent months, from Hong Kong to the UK to the Cayman Islands. Zhao, who has his company’s logo tattooed on his arm, said at a recent event that he is planning to step down as the CEO of Binance in favour of someone with a “strong regulatory background” in advance of a potential IPO.