Coinbase drops margin trading — because Bitcoin doesn’t scale

Margin trading is when you borrow to multiply the effect of your trading — so rather than just having $100 to trade with, you can borrow and trade with $200, using the $100 as collateral. If your trade pays off, you’ve done really well! If it doesn’t pay off, you lose your collateral.

Coinbase used to offer margin trading on Coinbase Pro. You could borrow US dollars, or the USDC stablecoin, from Coinbase, and use it to margin trade at up to 3× leverage. [FAQ as of August]

But Coinbase has withdrawn its margin trading product, as of today, 25 November. Paul Grewal, Coinbase’s Chief Legal Officer, says that this is due to “new guidance from the Commodity Futures Trading Commission.” [blog post; FAQ]

 

 

That “new guidance” would be the March 2020 CFTC guidance specifying that physical delivery of crypto-assets won on a margin bet takes place when the customer controls the asset, and the seller doesn’t. That would be when the customer controls the keys, and that requires the transaction to be on the coin’s blockchain. [Federal Register]

This is pretty simple, clear and obvious — you’re margin-trading a commodity, and at some point that ends in delivering the commodity.

Why is this only happening now? Because of COVID-19, the new rule wasn’t published in the Federal Register until 24 June. Add 90 days for the rule to take effect, then 60 days to implement, and we’re at November.

Mind you, this rule was first proposed in December 2017 — so it’s not like Coinbase didn’t see this coming. There’s a pile of market shenanigans the CFTC wasn’t so happy about at the time: [CFTC, 2017]

Beyond their practical and speculative functions, the emergence of these nascent markets has also been negatively marked by a variety of retail customer harm that warrants the Commission’s attention, including, among other things, flash crashes and other market disruptions,52 delayed settlements,53 alleged spoofing,54 hacks,55 alleged internal theft,56 alleged manipulation,57 smart contract coding vulnerabilities,58 bucket shop arrangements and other conflicts of interest.59 These types of activities perpetrated by bad actors can inhibit market-enhancing innovation, undermine market integrity, and stunt further market development.

Coinbase doesn’t go into detail in the announcement as to what’s so hard about implementing physical settlement — but when the CFTC was considering the rule, Coinbase’s submission to the CFTC said that their internal systems use a ledger in an ordinary database … because the Bitcoin blockchain couldn’t possibly scale to their transaction load.

(Note that Coinbase didn’t offer margin trading at the time — they only added margin trading when the proposed rule about physical delivery was already in the air.)

“For technological and practical reasons, Coinbase uses an internal ledger to show changes in ownership in the majority of conversion services and GDAX transactions.” (GDAX was the old name for Coinbase Pro.) [CTFC, 2018, PDF]

That is: the fabulous technological innovation of Blockchain is so universally applicable to businesses of all sorts, that it can’t even scale up to Bitcoin.



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3 Comments on “Coinbase drops margin trading — because Bitcoin doesn’t scale”

  1. Let us do some Fermi estimations…

    Bitcoin can sustain, what, 7 tps (?) globally. Let’s be generous and say 100 tps.

    If you want to be a “money system for the world”, you need to (at least) be able to deal with mean transaction rate over a short-to-medium timespan (“short” here is sub-second, “medium” is “under a minute”, about as much as you would be willing to stand behind someone paying in a queue).

    There’s, what, 5 billion people on the planet (low bound). Let’s say that 20% of them are “economically active” (as in “has at least one economic transaction per day”). Having observed myself and several colleagues, we perform “over 3” economic transactions per day. Let’s round that down to 2. So, you would need to sustain about 2 billion transactions per day, if you want to be “the global money” (arguably what BitCoin claim they want to be). At approximately 100 000 seconds in the day (86 400 rounds up pretty nice), you would need to be able to sustain at least 20 000 tps. This is of course ignoring a LOT of economic activity (no B2B, no exchange traffic, …).

    Since our low-balled “required tps” is 200 times our high-balled bitcoin tps capacity… Not to mention that my understanding that bitcoin clearing time is on average substantially over a second.

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