The true cost of zero-fee crypto trading is anything but zero
Binance set off hares last July when they announced the launch of fee-free trading for Bitcoin spot pairs. Coinbase’s share price fell nearly 10% on the news as the crypto world wondered if the race to the bottom had just begun.
Fast forward nine months, and Binance has dropped most of its zero-fee trading. Some exchanges may see this as an opportunity to pick up where Binance left off in a race to gain more market share. However, further experimentation with zero-fee models is ill-advised and certainly not where we want to be heading as an industry.
Eliminating fees to increase trading volumes must be avoided if we are to build a thriving, robust and sustainable crypto ecosystem. Without fees, we potentially breed an environment devoid of transparency, creating a much scarier world of monetization. This puts customers at risk, further erodes confidence in cryptoassets, and may ultimately undermine the potential of the digital asset 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 of these fractional one percent fees add up to billions of dollars in global revenue.
If you then take away the basic source of income, what happens? How do stock exchanges absorb the deficit and stay in business?
There are legitimate answers to that question. Coinbase, for example, has made great efforts to diversify its business model so that it doesn’t have to rely as much on its exchange-driven revenue. However, the truth is that for exchanges with less diversified business models, zero fees create an environment for them to be much less transparent about how they make 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 US Securities and Exchange Commission in December 2020 when it was fined $65 million for misleading customers about how it generated revenue from its trades.
With anti-crypto sentiment on the rise in the US, 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 major consequences for the sector, which is already facing an uncertain future in the US
Poor customer results
Eliminating transaction fees puts pressure on exchanges to generate revenue in any way possible. This can lead to exchanges taking excessive levels of risk to make ends meet.
Customers are the ones who ultimately pay the price for such disproportionate risk-taking. Should the exchanges miscalculate, everyday investors could be completely wiped out, leaving them without life savings or any way to recoup their losses.
Even when exchanges avoid excessive risk-taking, users who do not pay transaction fees are still more likely to suffer. Exchanges with lower revenues may well underinvest 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 way we should go. Exchanges play a specific role in providing an accessible avenue for both ordinary people and large institutions to gain exposure to cryptoassets. Instead of drawing in the masses with discounts and essentially paying for storage, the focus on providing quality, reliable and innovative products and services must be the main driver of growth.
Protection of integrity
Crypto is now at an interesting time. Having been born out of the 2008 global financial crisis in the form of Bitcoin as a better, more reliable alternative to the status quo, the larger crypto ecosystem has evolved remarkably, but has also faced its own crises. Recent high-profile failures – including TerraUSD and FTX – have weakened confidence in crypto. At the same time, we are currently in yet another existential TradFi banking crisis. This is a moment of incredible opportunity for the crypto sector, but one not without risk.
The onus is on the industry to quickly deliver on the original ideals that crypto is a fairer, more transparent and trustworthy financial system. Part of the way we do that is to create excellent products and services that are honest about how they make money.
For many investors, exchanges are the gateway to the crypto world, which means they have a particularly important role to play. Keeping transaction fees in place gives them a much stronger foothold to develop top quality platforms without having to rely on questionable and downright risky tactics. This is what prevents the sector from following the same path as traditional finance, where a heavy reliance on fractional banking services is the norm.
Part of crypto’s ethos to drive financial inclusion and decentralization of finance is to offer cheaper and borderless payments on layer-1 protocols like Bitcoin. But when it comes to exchanges, it’s also about offering users a practical, secure and reliable tool for their daily finances. This is simply not possible without fees.
