Cryptocurrency exchange, Coinbase Pro revealed that its customers currently using margin trading will not be able to place new margin trades starting 2 pm PT on the 25th of November. The existing margin positions of the customers of the platform that were created before this period will not be affected.
Moreover, at the expiration of the users’ loan term [25th day from the date of origination], the positions will be closed out by selling crypto for the value of the loan. Once the loan is closed, the customer will not be able to enter into a new margin position, nor will Coinbase Pro be able to enter into a position on the users’ behalf.
In an official blog post, Coinbase Pro revealed disabling margin trading for its uses, a step that was taken in response to the new guidance from the Commodity Futures Trading Commission [CFTC].
Margin trading is often deemed as a high-risk trading method. On the plus side, it enables traders to access greater sums of capital, thus allowing them to leverage their positions. Hence, margin trading amplifies trading results so that traders are able to realize larger profits on successful trades. This ability to expand trading results makes margin trading very popular.
But margin trading does have the obvious disadvantage of amplified losses in the same way that it can increase gains as it introduces the possibility of losses that exceed an investor’s initial investment.
As notified by Paul Grewal, the Chief Legal Officer of the San Francisco-based trading platform, all open limit orders will be canceled for customers using credit at this time. Furthermore, the product will be taken offline in December once all existing margin positions have expired.
Grewal went on to say that,
“We believe clear, common-sense regulations for margin lending products are needed to protect and provide peace of mind to U.S customers. We look forward to working closely with regulators to achieve this goal.”
While Coinbase Pro cited guidance around “actual delivery” of digital assets as the reason but did not specify which aspect of it led to its shutting down the service indefinitely. Earlier this year, the commission had clarified its stance on the “actual delivery” of assets seeking to include crypto purchased using leverage trading or other methods. The CFTC’s guidelines revealed that there would be a 28-day deadline for physical delivery, which essentially allowed buyers to use any purchased digital asset after that period.
The guidelines also meant that “actual delivery” has occurred when a buyer controls the digital asset purchased, and the seller has no control over it. Coinbase had previously raised concerns over the same in a letter to the commission.