Can Cryptos Can Cause Bankruptcy For Brokers?

With forex volatility so low and so much excitement about bitcoin and other altcoins, quite a few forex brokers have offered trading in these new and shiny cryptocurrencies. Brokers are responding to demand and by allowing trading on digital coins, they can attract new clients.

Yet these clients may not necessarily be the ones that brokers will make money from. They do not trade but only buy and wait for the price to rise and rise before selling. And that’s it. A one-sided market makes it hard to make a market. Market-makers are on the other side of almost all bitcoin trades.

And what about ECN/STP brokers? How do you pass the bitcoin buy orders to a liquidity provider if nobody is willing to do that? The hot potato remains in the hands of the broker.

We have seen a pre-Christmas crypto-crash that provided lots of volatility and two-sided action. This is good news. If this continues, some will go short, some will go long, and high volatility will provide the excitement that is missing from regular currency trading in recent years.

Yet in the meantime, it is those brave brokers in trouble. According to this report by Andrew Saks-McLeod of Finance Feeds, it is quite deep trouble for one broker, emphasis mine:

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 has, according to documentation submitted to FinanceFeeds, lost approximately $40 million as a result of allowing Bitcoin trading on its retail platform.

The firm concerned has now 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.

This particular broker, according to a number of its strategic partners, is now unable to pay its affiliates and is thus withholding said payments.