FTX and Binance reduce leverage to stimulate “responsible trading”
In reaction to a recent article by the New York Times, two leading crypto exchanges, FTX and Binance, have announced that they would be limiting the amount of maximum leverage their users can use to trade futures contracts. Both top exchanges have reduced leverages to 20x from over 100x.
Sam Bankman-Fried SBF), Chief Executive Officer of FTX said that the crypto exchange would be the first in the industry to make this move and thereby protecting users from the volatility that playing the derivate markets can bring.
The CEO tweeted that FTX’ decision was “a step in the direction the industry is headed and has been headed for a while.”:
9) And so, after lots of back and forth, we’re going to be the ones to take the first step here: a step in the direction the industry is headed, and has been headed for a while.
Today, we’re removing high leverage from FTX. The greatest allowable will be 20x.
— SBF (@SBF_Alameda) July 25, 2021
Following FTX announcement, fellow CEO of Binance, Changpeng Zhao, also seized the opportunity to state that the crypto platform was already limiting leverage for its new users to 20 times. He further hinted that this new policy could be extended to the existing users of the exchange too in the future.
.@binance futures started limiting new users to max 20x leverage last Monday, Jul 19th, 7 days ago. (We didn’t want to make this a thingy).
In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks.
— CZ Binance (@cz_binance) July 26, 2021
In The New York Times article that both exchanges were reacting to, suspicions were raised that the leverage positions these exchanges granted their users had played a role in the collapse of the crypto market in May. The article hinted of the possibility that regulators might start moving against such industry dynamics in the near future.
According to Bankman-Fried, cutting down the leverage option of its users might lead to an outcry and “bad press” for his firm. However, he did acknowledge that it is perhaps the “right thing to do” in light of “responsible trading.”
By trading in Bitcoin derivatives, crypto exchanges allow users to bet on the future price of the leading digital asset. Traders do not trade the underlying asset directly but predict where its price is headed. Considering that certain jurisdictions prohibit traders from such trade options in certain jurisdictions for mainly reasons of volatility, traders still find a way to circumvent this restriction through other means.
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Author: Peter Siu