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US crypto exchange Kraken stopped accepting deposits from South Africans on Friday last week, following a decision by the exchange’s banking partner to place SA on an anti-money laundering blacklist.
The crypto arbitrage premium, which last week ranged between 0,7 percent and 1,5 percent, spiked to 3,5 percent on Monday on the news.
This is seen as a direct consequence of SA being ‘greylisted’ in February by the Financial Action Task Force (FATF) for its lack of compliance with international standards on money laundering and terrorist financing.
Crypto arbitrage involves buying bitcoin (BTC) or a US dollar-pegged stablecoin such as USDC on an overseas exchange such as Kraken and selling it in SA for a profit.
These assets typically sell for higher prices in SA because of local exchange controls.
The arbitrage premium, or profit, tends to spike whenever there is a drop in trading volumes, as happened on Monday.
It also happened earlier in the year when Circle, the issuer of USDC, stopped accepting payments from South Africa and elsewhere in anticipation of tougher regulations.
Local crypto arbitrage providers were able to find alternative plans that allowed them to continue trading.
What now for those in SA?
Crypto arbitrage and forex specialist Future Forex emailed clients on Monday advising them of Kraken’s clampdown on deposits from SA.
“Fortunately, we have been rigorously testing an alternative provider for the past few months in order to offer reduced third-party fees and to ensure continuity of trading.
“We are pleased to share that we are in the final stages of testing with this alternative provider, and the results so far have been promising,” said the note to clients, adding that all funds were safe.
Omer Iqbal of FiveWest, which offers a crypto arbitrage service in SA, says the Kraken announcement comes just months after Circle stopped accepting deposits from South Africans.
“We don’t use Kraken, so our arbitrage services are unaffected. The premiums shot up on Monday because there are a number of different arbitrage companies using Kraken as their primary source of trading for their clients.
“Whenever you get restricted volumes, you get higher premiums, so this is good news for those (of)our clients who are not reliant on Kraken,” says Iqbal.
“When Circle stopped accepting deposits from SA, we got worried that this might repeat in the future, and that’s one of the reasons we didn’t want to rely solely on an exchange.
“While others have halted operations, we can continue trading and can exploit the rising premiums for our clients.”
No warning
Andrew Ludwig, co-founder of Currency Hub, says the news of Kraken’s halt on deposits from SA came without warning.
“Many [arbitrage providers] were forced to use Kraken when Circle was switched off, and this has caught them off guard.
“I have it from one source that the funds were sent back, and there’s a very good chance that the funds were gated.
“It could very well be a response by Kraken to the greylisting and the deeper due diligence that is expected of financial institutions around the world.
There has been debate within the arbitrage community as to whether the market will disappear altogether as more people see an opportunity to make relatively low-risk profits. After Circle throttled the crypto arbitrage market earlier this year, Dooya decided to insulate itself against a repeat event and found an alternative exchange to Kraken a few months ago, says Dowie.
“This has meant minimal impact on our trading today, and we very much remain business as usual and ready to take advantage of the increased premium for our clients until the Kraken situation is resolved.”
The events of the last few months have proven that you can never write off the arbitrage market, as unforeseen events have a habit of bringing it back to life, says Iqbal.
— Moneyweb
Online Reporter