Punks and avengers: Australian FX risk management technologist lashes out

If there is one thing we can all be clear about when looking back at the events that have taken place in many countries over the past 10 months it is that human beings have a short memory.

Since the semi-pathological obsession with crypto currency engulfed the lower echelons of the digital marketing and affiliate lead selling entities that littered the back streets of Ramat Gan and Limassol during the middle part of the 2010s, FinanceFeeds has held a solid opinion that the vast majority of crypto currency-related schemes are exactly that – schemes.

It was always clear and well recognized among the right and proper leaders of the genuine electronic trading industry in its major centers of London, New York, Sydney and Chicago that pseudo-venture capital in the form of Initial Coin Offerings is quite simply a vehicle for fraud, and those peddling it are in many cases the same low level semi-literate confidence tricksters that operated binary options platforms for 10 years.

What, therefore, were retail CFD providers thinking of when offering CFD contracts on cryptocurrency, a folly which led to tremendous losses and commercial embarrassment.

FinanceFeeds has made its stance clear on these matters from the outset of the rise to media prominence of this absurdity, and, along with the vast majority of long established companies, stands by it.

Hence, anything ‘crypto’ related in terms of marketing, or funding for a banal project that will never come to fruition, is as absurd as Icarus’ attempt to fly toward the sun.

The same can be said of blockchain technology development. Many inexperienced mavericks are now touting blockchain development as a means of raising capital, citing investments from very large institutions such as Goldman Sachs and PriceWaterhouseCoopers as reference points, when the reality is that, if they were to conduct a bit of research within those organizations (I spent 18 years of my 27 year career in electronic trading technology as a system developer within Tier 1 interbank electronic trading desks) they would soon realize that actually the R&D is not for blockchain, but for the development of proprietary distributed ledger technology to create transparency and automate certain administrative procedures relating to financial transactions.

Whilst the endless litany of blockchain related press releases have ceased, the crypto absurdity has not, despite the well documented pitfalls.

The Securities and Exchange Commission (SEC) views Bitcoin, and other unbacked peer to peer digital currencies as commodities, and indeed this is a viewpoint that FinanceFeeds agrees with.

The downside is that it may well be a commodity by definition, but unlike other commodities, it has no central issuer, and no raw material value to maintain its stability, or even more important, to stop its miners and exchange operators from stealing from e-wallets, or simply packing up and running away, circumstances that we have all seen before.

The Financial Conduct Authority (FCA) in Britain has gone the right route and banned the trading of cryptocurrency in its entirety, and not before time.

At the end of 2017, FinanceFeeds received documentation that demonstrates substantial losses sustained by the few retail brokerages that have allowed unrestricted cryptocurrency trading on their platforms, and unlike losses sustained by firms that transfer their orders to liquidity providers and become exposed to negative client balances in the case of extreme and unpredictable market volatility, as per the Swiss National Bank’s removal of the EURCHF peg in January 2015, these are losses sustained by categorically ‘b-book’ brokerages which internalize their trades.

There is no way to price or clear Bitcoin trades. No liquidity provider or prime brokerage will entertain it, as it is not a centrally issued currency, and Tier 1 banks only deal in centrally issued currency when extending counterparty credit to FX brokerages, hence its status as a commodity.

In one case, a well known retail brokerage which has a less than clean copybook in terms of due diligence when onboarding clients via its very unorthodox methodology in the United Kingdom, according to documentation submitted to FinanceFeeds three years ago, lost approximately $40 million as a result of allowing Bitcoin trading on its retail platform.

The firm concerned subsequently implemented a 20 minute maximum trading window for Bitcoin, meaning that the broker will automatically close trades after 20 minutes on all Bitcoin related activity. This is almost like a long binary option, however based on a currency which does not exist, and a commodity that cannot be delivered nor demonstrate physical value.

So given the background of fraud, collapsing exchanges, bandwagonism that ranged from ‘the banks are building blockchain therefore Bitcoin is the future’ which died a death, to ‘Covid is creating chaos in the markets, by Bitcoin’ to ‘let’s circumvent the banksters who are all in it for themselves’, here we are in 2021 and there are still brokerages that think its a good idea to offer crypto CFDs.

From US government seizures of entire marketplaces operated on the dark web which use tokens and cryptocurrency, to disappearing mavericks running away to Central America with the false currency and no recourse for investors, to lamps and tokenized non-entities, to everything ending with the domain ending ‘IO’, we have had a decade of snake oil sales.

Richard Goers, Managing Director of trading platform development company ManagedLeverage, based in Australia, spoke to FinanceFeeds about this matter today.

Looking back at that moment when many retail brokers got their fingers burned, Mr Goers said “We know that what happened in December 2017 to b-book FX margin brokers offering cryptocurrency CFDs. Three years later in December 2020, BTC going from $17,000 to $32,000 and in January 2021 ETH moving up 200% as with many DeFi tokens, the same is being offered. Perhaps the FX brokers learned some lessons.”

Mr Goers raised the point “It is interesting to think about OANDA luring experienced traders with 100:1 leverage. 100:1 was always an option for FX margin brokers to lure experienced traders as they have more capital at play. Think Saxo Bank, CMC Markets, IG Group, as examples, but do experienced traders use 100:1 outside of HFT or algorithmic trading?”

“It is also interesting that new digital currency based derivative exchanges are looking to go 24/7 with synthetix US stocks, such as mirror, finance, perpetual swap, injectiveprotocol.com, INX.co, and one Chicago exchange closed late 2020, and it was offering stock derivatives, therefore we can perhaps assume that crypto punks want to trade US stocks like BTC” said Mr Goers.

“Also I recommend to have a look at the development of Synthetix.io which is a digital asset derivative exchange that offers most asset classes to speculate but also fund management services. I think companies such as Uniswap and Injectiveprotocol may well go down the same path” said Mr Goers.

“Now this is more that these exchanges are going to multi assets with high leverage, and are unregulated. Unfortunately they are B Book but the amazing thing is the retail traders who buy their native tokens, such as SNX, and then stake these tokens into a collateralised liquidity pool and take the risk or the other side on trader exposures, thus the broker has its client taking the risk on the NOP exposures. The broker then just banks the money from token sales. Basically for crypto punks and WallStreetBets retail avengers, one door closes – regulated CFD brokers – and another opens, that being digital exchange brokers which are in some respects smarter, leaner and take on banking services” said Mr Goers.

Thus, what started out as an attempt to disrupt and cause rebellion is continuing to do so, but under a different methodology.

Mind how you go….