On January 3, 2009, Bitcoin was officially born, not just as an idea, but as an operation. With the first transaction in its history, transmitted to the blockchain network, Satoshi Nakamoto registered in the genesis block a message that would change forever the future of the financial sector in the world.
The message contained in the first block of Bitcoin alludes to the headline in the British newspaper The Times that day, indicating Satoshi’s critical view of the banking system and the financial disorder caused by decades of state currency monopoly and fractional reserve banking.
In a few years, Bitcoin started to gain more and more users. And since then, companies, players, and projects in the cryptocurrency sector have always had problems with traditional banks and governments around the world. From closing the account to banning operations by jurisdictions around the world, crypto has always been seen and stigmatized by the traditional industry as something criminal-related ( even though fiat money remains the most used for crimes, as numerous studies show).
Despite the hurdle of governments and the attempt by banks to stop cryptocurrencies, people around the world continued to be interested in the asset. Within a few years, a whole new financial ecosystem (DeFi, Stable) emerged, both replicating traditional financial products and creating never-before-seen instruments (NFTs).
Margin trading operations were one of the strategies imported from the traditional sector that had an astronomical success in the crypto market.
Margin Trading explained
In finance, a margin is a guarantee that traders deposit to cover their credit risk, so they can borrow money from the broker to buy financial instruments, go short or trade a derivative contract. Briefly, it is a trade in which traders buy and/or trade more payout shares than they have. They offer a cover and bet on a move. If the asset moves in the direction they bet, they win, if it moves in the reverse position it is liquidated.
A margin trade is an easy way to make money fast. But at the same rate, it’s a quick way to lose money. And due to the risk of losses associated with trading, historically, margin trading has only been available to embedded investors with a net worth in the millions.
What cryptocurrencies did, as in many financial instruments, was to democratize access, which was previously restricted to one group, to anyone in the world. Of course, due to the associated high profits, cryptocurrency users rushed to trade and leveraged margin trading.
With the success of the strategy (it is relatively easy to bet on an asset that historically only grows), more and more cryptocurrency exchanges announce a margin offer with leverage of 10, 50, 100 times. And Binance – the most popular exchange in the world and with the highest trading volume – was one of the companies responsible for popularizing an operation for retail investors all over the world.
Tightening restrictions on Binance
However, as users rushed to trade leveraged trades at Binance, more and more regulators were taking a hard look at cryptocurrency trades that were starting to move billions daily. After the 2019/2020 boom, regulatory pressures formulated to take more and more shape, and Binance – is paying for its success.
In late June, Britain’s Financial Conduct Authority said that Binance Markets Limited, the British division of Binance, “is not allowed to carry out any regulated activity in the UK”.
From June 30, Binance adds a notice on its website and apps showing U.K. users with the following text.
BINANCE MARKETS LIMITED IS NOT PERMITTED TO UNDERTAKE ANY REGULATED ACTIVITY IN THE U.K. Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA. (No other entity in the Binance Group holds any form of U.K. authorization, registration, or license to conduct a regulated activity in the U.K.).
At the same time, The Financial Services Agency (FSA) issued a warning that Binance is not registered to do business in Japan. At the beginning of the following month, it was Italy and Thailand’s turn.
”Binance Group companies are not authorized to provide investment services and activities in Italy, even via the exchange’s main website which has offered information in Italian on derivatives and tokenized versions of stocks”, Consob said in a statement.
Thailand’s financial watchdog filed a criminal complaint against cryptocurrency exchange Binance for operating a digital asset business without a license and said in a statement that Binance had been operating a digital asset business “in the category of a digital asset exchange” without a license. Due to the sanctions, Binance announced on August 10 that it would suspend margin trading for bitcoin, ether, and other large cryptocurrencies and their Australian dollar, euro, and sterling pairs.
A few hours before the announcement, Binance’s CEO Changpeng Zhao had posted a tweet notifying users that Binance had started limiting the leverage for trading to 20x for all new users – down from 100x.
“Binance futures started limiting new users to max 20x leverage last Monday […] In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks,” the tweet read.
The pressure exerted on Binance made the company reduce its offers and increase its Know your Customer (KYC) requirements. As a result, the exchange has been suffering from a large outflow of balances from the requirement.
BTC Netflow on Binance shows a deep negative for 26 July | Source: CryptoQuant
Despite this, Binance is still number one in trading volume. The company doesn’t seem willing to relinquish the throne so quickly.