Crypto exchange VALR announced this week that it will no longer offer crypto arbitration to new customers starting January 31, and the arbitration service to existing customers will be discontinued by February 28.
“The decision to discontinue our arbitration service was made to comply with some of the requirements of our banking partners,” VALR said in a statement. “No other VALR services are affected and your funds remain safe. You will continue to have access to Africa’s largest crypto asset market with the ability to buy, sell and store over 60 cryptos on VALR.
Crypto arbitrage has become extremely popular in South Africa by allowing investors to take advantage of crypto asset price differences between foreign and local exchanges.
The chart below from CURRENCY HUB shows a 2-4% arbitrage spread in True USD (TUSD), a US dollar-backed stablecoin that can be bought cheaply overseas and sold in South Africa at a higher price. This percentage is the gross premium, before deduction of fees – which can be 1 to 2% –.
Read: OVEX exits crypto arbitrage while announcing multi-country expansion program
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 raw 2-4% .
Ironically, arbitrage providers believe that the exit of OVEX and VALR removes competition from the market and could cause the arb spread to widen.
The amount of funds available for arbitration by an investor is limited to a maximum of R11 million per year – a Special Discretionary Allowance (SDA) of R1 million and a Foreign Investment Allowance (FIA) of R10 million rands per year, which requires the South African tax service (Sars) 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 COO Gianluca Sacco said crypto arbitrage is only a small part of its business, and the decision to shut it down is due to an update. up to date with the requirements of its banking partners. “We value our banking relationships, which is why we felt it prudent to shut down the crypto arbitrage business and focus on our core business, which is crypto trading.”
Crypto arbitrage is largely unregulated, although it does require the purchase of currencies from a licensed forex broker, and all crypto arbitrage providers subject clients to Know Your Customer (KYC) checks ).
Do banks feel threatened?
Asif Aziz, chief technology officer for crypto exchange LIBEX, claims that one of its banking partners also pressured the company to suspend its arbitration service, prompting it to transfer its account to another bank. better disposed to crypto arbitrage.
Banks would have been hostile to crypto arbitrage for some time, evidently seeing customers buying large amounts of currency for export, not paying much attention to the return flow as these crypto trades were closed and profits recycled to SA.
Arbitrage trading became something of a cottage industry in South Africa, as dozens of investors saw it as a relatively risk-free way to make a profit. Although less risky than simple crypto investing, there are risks associated with crypto arbitrage, including the danger of an adverse currency or crypto price movement while the trade is in play, or the one of the crypto service providers involved in the chain goes bankrupt. .
CURRENCY HUB, which is the only provider in South Africa with its own financial services and a forex trading license, is one of the companies likely to take market share from OVEX and VALR.
Being able to offer forex in-house, with the discretion to time the market and execute trades on behalf of the client, gives them more fat to cut margins if necessary to help increase the client’s net margin at 1%, says Andrew Ludwig, founder of CURRENCY HUB.
“Forex costs normally consume 0.3-0.6% of the margin, and that’s before the arb provider has taken a cut. Recently, margins have been so low that some service providers arbitration have been bank losses for their clients.