Traders torn between onshore and offshore crypto exchanges


A parliamentary committee has backed a Bill that will allow the taxation of more than four million Kenyans estimated to be trading in cryptocurrencies. PHOTO | SHUTTERSTOCK

Will it be the Golden State Warriors (defending champions) or Milwaukee Bucks for the NBA 2023 championship?

My bet is on the former (although the Bucks remain hot favourites to bring home the trophy). Time will tell.

But as we wait for the final score, yet another battle demands to be settled; onshore or offshore crypto?

Will it be the lightly regulated offshore markets associated by many with the dark web, money laundering and the Wild West or the onshore regulated exchanges subject to strict checks on governance and client vetting? Time will tell.

Just to give context. When Bitcoin was born, it was a symbol of counterculture, a rebel currency with near-anonymity and a lack of regulation.

A couple of years later (punctuated by “lost keys” and lost digital wealth), there are growing signs it’s entering the establishment its creators sought to subvert.

A push towards the regulated side is slowly becoming reality. Not voluntarily though. So, on one hand, you see “over the counter” exchanges being harassed by regulators and taunted with digital currency bans while on the other, you see regulated exchanges freely facilitating record levels of investor money into cryptocurrency derivatives.

As a result, to date, open interest on bitcoin futures contracts - those that haven’t been settled - on the biggest regulated exchange, US-based CME Group, is at an all-time high with a value of Sh12 trillion or some 400,000 BTC.

It’s no secret institutional investors are behind this curve. Bound by strict compliance rules but hungry for a piece of the action, they are seeking the kind of protection that will satisfy their compliance officers.

They are also buying Bitcoin futures to gain exposure to the asset while avoiding the hacks and heists that plague the industry.

It’s logical they would want to be moving in this direction, especially considering their size and how much more there is at stake.

After a difficult 2022, Bitcoin has risen over 80 percent year to date. Besides, futures are seen as key components of any mature market, as they boost market liquidity, allow investors to bet on the direction of prices and give a high degree of transparency.

That notwithstanding, the battle is not over yet. The competition between the two venues is going to get stimulating and even attract more crypto converts.

For now, there’s no question offshore exchanges still command the bulk of the multi-billion-dollar daily market. It’s possible that after the dust settles, retail investors choose to remain.

This is because offshore exchanges tend to accept business from investors who can sign up with few checks on their identity or the provenance of their funds.

A great advantage, in my view, is that they offer perpetual contracts, which are future-like derivatives with no expiry.

Be that as it may, whether onshore or offshore, crypto traders living on this side of the world are mostly retail and therefore hold little sway power in this battle.

That said, time will tell whether offshore exchanges are going to diminish in scale and influence. What’s more important, the crypto bull is back after a long winter.

The writer is the managing director of Canaan Capital.