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VALR is the latest to exit crypto arbitrage market

Crypto exchange VALR announced this week that it will no longer be offering crypto arbitrage to new customers from January 31, and the arbitrage service to existing customers will be wound down by February 28.

“The decision to discontinue our arbitrage service has been taken to comply with some of our banking partner requirements,” says VALR in a statement. “No other VALR services are affected and your funds remain secure. You will continue to have access to Africa’s largest marketplace for crypto assets with the ability to buy, sell and store over 60 cryptos on VALR.”

Crypto arbitrage became hugely popular in SA by allowing investors to profit from price differences in crypto assets between overseas and local exchanges.

The graph below from CURRENCY HUB shows an arbitrage gap of 2-4% in True USD (TUSD), a stablecoin backed by US dollars that can be bought cheaply overseas and sold in SA for a higher price. This percentage is the gross premium, before costs – which can be 1-2% – are deducted.

Read: OVEX exits crypto arbitrage while announcing multi-country expansion programme

The ‘arb gap’, as it is known, has declined in recent years – from 3-8% four years ago (and as high as 20% on occasion) to a gross 2-4%.

Ironically, arbitrage providers believe the exit of OVEX and VALR removes competition from the market and may cause the arb gap to widen.

The amount of funds available for arbitrage by an investor is limited to a maximum R11 million a year – a R1 million Special Discretionary Allowance (SDA), and a R10 million a year Foreign Investment Allowance (FIA), which requires South African Revenue Service (Sars) approval, and only if a tax clearance certificate has been issued to the client.

The same arbitrage opportunities are available in other cryptos like Bitcoin (BTC) and Ethereum (ETH).

Speaking to Moneyweb, VALR chief operating officer Gianluca Sacco says crypto arbitrage was a small part of its business, and the decision to close it down is due to an update to the requirements of its banking partners. “We value our banking relationships, which is why we felt it prudent to close down the crypto arbitrage business and focus on our core business, which is the crypto exchange.”

Crypto arbitrage is largely unregulated, though it does require purchasing forex from a licensed forex dealer, and all crypto arbitrage providers put clients through Know Your Customer (KYC) checks.

Banks feeling threatened?

Asif Aziz, chief technology officer for crypto exchange LIBEX, says the company was likewise pressured by one of its banking partners to suspend its arbitrage service, prompting it to move its account to another bank better disposed to crypto arbitrage.

Banks have reportedly been hostile to crypto arbitrage for some time, evidently seeing customers purchase large amounts of forex for export, without paying much heed to the return flow as these crypto trades were closed out and profits recycled back to SA.

Arbitrage trading became something of a cottage industry in SA as scores of investors saw it as a relatively risk-free way to make profits. While less risky than straight crypto investing, there are risks associated with crypto arbitrage, notably the danger of an adverse movement in currency or crypto prices while the trade is in play, or that any one of the crypto service providers involved in the chain goes bust.

One company that stands to pick up market share from OVEX and VALR is CURRENCY HUB, which is the only provider in SA with its own financial services and forex trading licence.

Being able to offer forex in-house, with the discretion to time the market and execute trades on behalf of the client gives it additional fat to cut margins when needed to help lift the net margin for the client to 1%, says Andrew Ludwig, founder of CURRENCY HUB.

“Forex costs normally eat 0.3-0.6% out of the margin, and that’s before the arb provider has taken a cut. Recently, margins have been so low that some arbitrage service providers have been banking losses for their clients.”

Read More : VALR is the latest to exit crypto arbitrage market

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