Why Is Coinbase Canceling All Margin Trading Starting This Week?

Coinbase recently announced it is disabling its margin trading product by December but will begin disallowing customers from placing new margin trades starting Wednesday. By December, when all existing margin positions have expired, the product will be shut down.

The popular cryptocurrency exchange said this was in accordance with regulations from the Commodity Futures Trading Commission (CFTC) around “actual delivery” of the assets in a margin trade and contract.

In margin trading, a customer borrows funds from the exchange itself to cover their investment in a cryptocurrency. In this way, the trader could increase their profits. At the same time, they could also increase their loss if the price does not go their way. In case of a loss, the asset will be liquidated.

For the CFTC, “actual delivery” involves the customer having control of the cryptocurrency they purchased, including when it was acquired through a margin product. The seller would have no control over that cryptocurrency (the asset) anymore.

This means it also cannot be liquidated, in contrast with the fact that a margin trade that resulted in a loss would lead to liquidation, the way margin products are currently designed.

Coinbase previously sent a letter in 2018 to the CFTC about the issue, stating that such a rule would prevent any regulated U.S. cryptocurrency entity from holding assets acquired through margin transactions, according to Coindesk.

CFTC, however, prevailed and released its final guidance this year. It stated that the offeror, seller or affiliated entities cannot have any interest, legal right or control over the commodity, the news outlet added.

Coinbase, already a regulated entity, would need to register with the regulator as a commodities exchange if it intends to continue offering margin trading products, the report said. Coinbase relaunched its margin trading service this February after suspending it in 2017.

Finally, the exchange called for common-sense regulation for margin lending products.

“We believe clear, common-sense regulations for margin lending products are needed to protect and provide peace of mind to U.S customers,” Coinbase said, adding that it will continue working closely with regulators to achieve that goal.