In March of this year FTX acquired a CySEC licence to operate in Europe. They have since started offering a CFD-like product called Spot+ and futures trading to clients in Europe.
As a former colleague pointed out, this was probably because you cannot passport spot crypto trading across Europe as no licence exists to do so. However, you can passport across Europe with a derivatives licence.
Now it seems that Binance is stepping up to do something similar. The exchange has set up an entity in Cyprus and is purportedly going through the process of getting regulatory approval from CySEC.
The exchange’s Cypriot entity lists Jonathan Farnell as a director. Farnell, who is based in the UK, was previously a compliance director at eToro and joined Binance in April of this year.
That same month, Demetra Charalambous, previously eToro EU’s head of finance, joined the exchange with him. She is based in Cyprus and, as with Farnell, her role seems geared towards the regulatory side of things.
Far away on the other side of the world, Binance received a licence in Australia at the end of last month to start offering CFD trading to institutions and professional investors. It’s unlikely the company will only want to act as a liquidity provider in the country and so it’s probably the case that they’ll ultimately look to get licensed to attract retail clients too.
At the same time as Binance was getting its ASIC licence, FTX’s US division launched cash equities trading and confirmed it would be looking to launch options trading as well. The company claims it won’t be relying on payment for order flow to make money, but given the tiny fees they’re charging it seems plausible they’re making a book on that flow themselves.
The moves the two crypto exchanges are making into other products are still tentative or at an early stage. It’s possible neither company will bother making any serious move into the CFD space, for example. Nonetheless, brokers in the CFD sector should pay attention to the steps they’re taking.
The reason for that is there is an increasing overlap between the two sectors. With some exceptions, the major CFD providers are increasingly branching out into new products, like crypto, share dealing, and options trading. But as the above illustrates, companies that started life as crypto exchanges are doing the same thing.
If we take IG as an example, its US division will probably be in direct competition with FTX if the latter does end up adding options trading. Given the US is arguably IG’s biggest opportunity for growing revenue, it is hard to imagine their team in the Land of the Free isn’t aware of what Sam Bankman-Fried is up to, even if the FTX CEO does pretend to just be a crypto dork.
Then there is the possibility that these companies do move into the products that CFD providers have traditionally hocked. The speed with FTX has added stock trading, for example, is remarkable. When you consider how much money Binance and FTX are likely to have, the brand recognition they’ve accrued, and the vast numbers of clients they can shift over to other products, this is quite a daunting prospect. Ignore them at your peril!
The start-up facade
There’s a saying in Russian that lies have short legs. In the startup world, lies have longer legs as long as interest rates stay low. To illustrate this point, we can look at a couple of recent announcements.
The first came from Revolut, with the neobank claiming it had launched as a bank in Ireland and hit 1.9m customers in the small country. The first claim was misleading given that it’s actually regulated as a bank in Lithuania and was just passporting into the country.
The other point about customers was more interesting. Ireland currently has a population of just over 5m. However, only about 3.8m people are over the age of 18 and thus able to open an account with Revolut.
If Revolut has 1.9m users in the country, that would mean about half of Ireland’s adult population uses the app. When you factor in the 5% – 10% of adults that don’t have smartphones, and so can’t access the app, then the 1.9m figure looks even more impressive.
This is not implausible but it is remarkably high and does make you wonder how Revolut defines ‘user’. Luckily we can learn the answer to this question from their latest set of accounts…
“A customer is a person or business who has accepted Revolut’s terms and conditions.”
This is a bit like me setting up a physical shop and 1,000 people come in and buy nothing. When my friend asks me how it’s going, I can say, “absolutely amazing, I had 1,000 customers today.”
It’s a similar story with new commission-free broker Lightyear, which recently announced it was ‘expanding’ into 19 new countries in Europe. Readers may notice a remarkable coincidence here which is that there are also 19 countries that use the euro and these also happen to be the same countries that Lightyear is expanding into.
So what actually happened was Lightyear launched euro denominated accounts and expanded into 19 countries it was already able to access via passporting rights.
I don’t want to be totally down on these companies – I use Revolut and think it’s a great app. But it doesn’t matter how many customers you have or markets you expand into if the cost of doing so exceeds the amount of money it generates.
This sort of dishonest behaviour seems largely geared towards building hype and increasing valuations. In an era of cheap money, with the ever elusive promise of profit driven by ‘scale’ lying somewhere on the horizon, this was arguably a strategy that worked. As rates rise and cheap financing dries up, it makes less and less sense. You can keep running but in the end the truth will catch up with you.
Stuff that happened