U.S crypto exchange, Kraken, has stopped accepting deposits from South Africans following a decision by the exchange’s banking partner to place South Africa on an anti-money laundering blacklist.
Consequently, the cryptocurrency arbitrage premium, which fluctuated between 0.7% and 1.5% in the last week of August 2023, experienced a sharp increase to 3.5%.
This surge is directly attributed to South Africa’s ‘greylisting’ by the Financial Action Task Force (FATF) in February 2023 due to its non-compliance with international standards related to money laundering and terrorist financing.
Kyle Dowie, Co-Founder of crypto arbitrage provider, Dooya, says the Kraken announcement caused upheaval in the market.
“Many arbitrage providers use Kraken as their offshore exchange, and so post the announcement on Friday, many arbitrage providers are unable to trade at the moment. The premium in the arbitrage market has increased significantly as a result of less arbitrage trading in the market. We expect Kraken to announce a new banking partner sometime in the next few weeks or months, but there is no definitive timeline on this from Kraken yet.”
Crypto arbitrage is a strategy that entails purchasing cryptocurrencies like Bitcoin (BTC) or a stablecoin like USDC on an overseas exchange, such as Kraken, and subsequently selling them in South Africa at a profit.
According to the report, this approach is profitable because these assets tend to command higher prices in South Africa due to local exchange controls and market dynamics.
Also referred to as profit margin, the premium margin often experiences an increase whenever there is a decline in trading volumes, as was the case following the suspension of deposits on Kraken. Similar instances are said to have occurred earlier in 2023 when Circle, the issuer of USDC, suspended payments from South Africa and other regions in anticipation of stricter regulations.
Still, several local crypto arbitrage providers managed to identify alternative solutions that enabled them to continue trading.
“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,” said Omer Iqbal of FiveWest, which offers a crypto arbitrage service.
“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.
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While others have halted operations, we can continue trading and can exploit the rising premiums for our clients.”
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