‘Crypto Broker’ Business Model Raises Suspicions from Authorities Worldwide

With the advent of the cryptocurrency industry, one of the first components that were required for the adoption of cryptos to spread was the existence of exchanges. The emerging trend of so-called “cryptocurrency brokers” however, appears to be attracting unwanted attention from multiple financial regulators worldwide.

Just as binary options were partly responsible for the massive crackdown on Forex and CFDs brokers, now crypto brokers that claim to be resellers of cryptos are in a way acting against the interest of legitimate exchanges.

Such brokers are not regulated anywhere and are not offering CFDs on crypto. Instead, they claim to be buying Cryptocurrencies on exchanges and hold those for clients. Except there is no way to verify whether they do it, as the deposits of their clients are quickly eaten away by the extreme overnight interest rates they charge to hold a position.

The result is that providers either end up with the client's crypto which is unaffected by any interest rates, or they never buy the crypto in the first place.

The Business Model

What the so-called “crypto brokers” are doing is to resell the same service that exchanges are providing at a markup. What they usually omit to their clients is that holding a position for the long haul is virtually guaranteeing them losses. The reason for this is the absurd interest charges that such venues are charging.

Ranging from 200 to 500% per annum (possibly even more), any client that buys a cryptocurrency by using a “crypto broker” is warranted to lose a lot of money due to the overnight rates that are being charged to the customers.

Authorities Paying Close Attention

While it took authorities several years (if not a decade) to identify binary options operators as a risk to customers the focus on crypto brokers seems to have come only months after they started emerging. The UK FCA has been focusing several warnings on the industry, and if history is any guide, law enforcement is already attempting to follow up. The Managing Director of Singapore's Monetary Authority recently gave a speech on crypto titled, "Crypto Tokens: The Good, The Bad, and The Ugly."

The addition of fraudulent and questionable ICOs to the mix is also likely to raise further suspicion. Just a couple of weeks ago the savedroid ICO raised alarm bells across the crypto community. While authorities have not officially shared any insight about their thinking, BaFin is most certainly aware of the use of its name by the CEO of the company, Yassin Hakkir.

Hot Sales Boiler Rooms

The operations of “crypto brokers” also include a classic component of every Ponzi scheme: hot sales tactics. Call centers targeting EU clients to solicit them to deposit into binary options and forex brokers have been operating for years from countries such as Bulgaria and Romania, where labor is cheaper.

The ban on such practices on the part of EU authorities has done nothing but force such operations outside of the EU. Countries such as Bosnia and Herzegovina, Kosovo, Macedonia, and Ukraine are only a few of the locations where the new boiler room operations are based.

With the aspirations of such countries to get closer to the EU, they will eventually cease to be a haven. Crucially, however, the most important actions for authorities to take are still inside the EU. The latest batch of regulatory action has turned to corporate giants Google and Mastercard.

The result is that providers either end up with the client's crypto which is unaffected by any interest rates, or they never buy the crypto in the first place.