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The true cost of zero-fee crypto trading is anything but zero

Updated: Aug 4, 2023


This article originally appeared on Forkast.


Nothing in life is free. Be wary of crypto exchanges that offer ‘free trading,’ and ask hard questions about how they make money, writes Ben Caselin of MaskEX.

Binance set hares running in July last year when it announced the launch of zero-fee trading for Bitcoin spot pairs. Coinbase’s share price fell nearly 10% on the news as the crypto world pondered whether the race to the bottom had just got underway.


Fast forward nine months, and Binance has dropped most of its zero-fee trading. Some exchanges might see this as an opportunity to pick up where Binance left off in a race to grab more market share. Further experimentation with zero-fee models, however, is ill-advised and certainly not where we want to be heading as an industry.


Eliminating fees to boost trading volumes has to be avoided if we are to build a thriving, robust, and sustainable crypto ecosystem. Without fees, we are potentially breeding an environment devoid of transparency, creating a much murkier world of revenue generation. This puts customers at risk, further erodes trust in crypto assets, and could ultimately undermine the potential of the digital assets space as a viable alternative to centralized fractional banking.

If not fees, then what?


It’s no secret that transaction fees are big business for crypto exchanges. All those fraction-of-a-percent fees add up to billions of dollars in global revenue.


If you then take away that fundamental revenue source, what happens? How do exchanges make up the shortfall and stay in business?


There are legitimate answers to that question. Coinbase, for instance, has gone to great efforts to diversify its business model so it does not need to rely as heavily on its exchange-driven revenue. The truth is, however, for exchanges with less-diversified business models, zero fees create an environment for them to be much less transparent about how they’re making money, and almost certainly encourage more risk-taking.


As transparency evaporates, regulatory interest grows. Online brokerage Robinhood found itself on the wrong side of the U.S. Securities and Exchange Commission in December 2020 when it was fined US$65 million for misleading customers about how it generated revenue from its trades.


With anti-crypto sentiment on the rise in the U.S., regulators are likely to take an even greater interest in any crypto players deemed to be failing their customers with a lack of transparency. This could have huge ramifications for the sector, which is already facing an uncertain future in the U.S.


Poor customer outcomes


Eliminating transaction fees puts exchanges under pressure to generate revenue by any means possible. This can lead to exchanges taking on excessive levels of risk to make ends meet.


Customers are the ones who ultimately pay the price for such disproportionate risk-taking. Should exchanges miscalculate, everyday investors can be totally wiped out, leaving them without their life savings or any way to recoup their losses.


Even when exchanges are avoiding excessive risk-taking, users who aren’t paying transaction fees are still more likely to suffer. Exchanges with lower revenues may well under-invest in their platforms, resulting in a poorer user experience. They may well also cut corners on security measures, leaving user data and funds vulnerable to malicious actors.


This is clearly not the path we should be taking. Exchanges play a specific role in offering an accessible avenue for everyday people and large institutions alike to gain exposure to crypto assets. Rather than drawing in the masses with discounts and essentially paying for retention, focusing on providing quality, trustworthy, and innovative products and services must be the main driver of growth.


Safeguarding integrity


Crypto now finds itself at an interesting juncture. Having been born out of the 2008 global financial crisis in the form of Bitcoin as a better, more trusted alternative to the status quo, the larger crypto ecosystem has developed remarkably but has also faced its own crises. Recent high-profile failures — including TerraUSD and FTX — have eroded trust in crypto. At the same time, we currently find ourselves in yet another existential TradFi banking crisis. This is a moment of incredible opportunity for the crypto sector, but one not without risk.


It’s incumbent on the industry to rapidly deliver the original ideals of crypto being a fairer, more transparent, and trusted financial system. Part of how we do that is by creating excellent products and services that are honest about how they are making money.


For much of the investing public, exchanges are the gateway into the world of crypto, meaning they have a particularly important role to play. Keeping transaction fees in place gives them a much stronger footing to develop top-quality platforms without having to rely on questionable and overtly risky tactics. This is what keeps the sector from following the same pathway as traditional finance, where a heavy reliance on fractional banking is the norm.


Part of crypto’s ethos of driving financial inclusion and decentralizing finance is to offer cheaper and borderless payments on layer-1 protocols such as Bitcoin. But when it comes to exchanges, it’s also about offering users a convenient, secure and reliable tool for day-to-day finance. This is simply not possible without fees.


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