Billionaire fintech entrepreneur and founder of ZeroDha, Nithin Kamath, said on Wednesday that crypto derivatives exchanges operate in a dangerous regulatory grey area that he says is being exploited and “has to be fixed.”
Comparison to Schrödinger’s cat
In remarks circulated by the investor, Kamath likened the current state of crypto futures and options platforms to “Schrödinger’s cat — neither fully regulated nor unregulated.”
He said ambiguity creates two major risks for retail participants. “The first risk with unregulated platforms is, of course, that there’s nothing you can do if something goes wrong,” he added
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Kamath also pointed to conflicts of interest where an exchange acts as the counterparty to users’ trades. “In many cases, the platform itself can be the counterparty to all the trades, like dabba trading or CFDs,” he said.
“If the platform is the house, the incentives are distorted. It’s good for the platform if the customer loses money because every customer win is the platform’s loss.”
What do the platforms get?
His second was related to extreme leverage. Kamath said that platforms regularly offer 100x–200x leverage, which, with crypto’s notorious volatility, is enough to wipe out traders on very small price moves: “At that level, even a small move is enough to make you go bust. Considering the volatile nature of crypto, this is all but guaranteed.”
Kamath said the lack of clarity on crypto derivatives regulation “is not a good thing in the long run for anyone and has to be fixed.” He called on policymakers and industry participants to close the gaps that leave retail traders exposed to outsized risk and little recourse.
The comments add to growing public scrutiny of crypto derivatives markets and the practices of venues that offer high-leverage trading products to retail users.
India and crypto
There is currently no legislation governing cryptocurrencies in India. According to a government document seen by Reuters in September of this year, India intends to retain little regulation of the cryptocurrency industry rather than enacting specific legislation.
According to the Reserve Bank of India (RBI), controlling the risks connected with digital assets through formal regulation would be tough. The RBI points out that formal regulation may provide cryptocurrency “legitimacy” and perhaps become the industry’s systemic risk, increasing financial system risks.
A total ban on cryptocurrencies could lessen the dangers associated with speculative assets, but it would not prevent peer-to-peer transfers or trading on decentralised platforms, according to the government paper.
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