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Will Robinhood force crypto trading to go ‘no-fee’?

September 24, 2021, 12:57 AM UTC

When Robinhood burst onto the stock-slinging scene in 2014, its promise to charge no fees on trades struck people as a revelation. Five years later, most brokerages reluctantly followed suit, slashing their lucrative commissions to remain competitive.

Now Robinhood is expanding its crypto business. The company said Wednesday it would soon start testing digital wallets, which let people spend, trade, and receive digital coins, such as Bitcoin and Ether. The plan, which involves making the wallets widely available early next year, raises a question: Could Robinhood force a similar fee-free shift in the world of crypto trading?

“The fact that in crypto people are still charging commissions on trading fees, that’s insane,” Christine Brown, chief operating officer of Robinhood’s crypto business, said on stage at the Mainnet crypto conference in Manhattan on Wednesday. Indeed, many crypto exchanges, like Coinbase, Binance, Gemini, and Kraken, do charge fees, usually a percent of the amount to be purchased.

Companies that don’t charge up-front fees, like PayPal, Square’s Cash App, Revolut, and, of course, Robinhood, make money a different way. They opt, instead, to take advantage of the “spread,” or the differences between the “bid” and “ask” price on any given trade. Like in the stock-trading business, many of them also get paid to route trades through certain market makers in a controversial practice called “payment for order flow,” which has recently come under fire by policymakers.

People who buy crypto the supposedly fee-free way basically guarantee that they will not get the best price upon execution of a trade. Fee-shirking venues offer coins to buyers at higher prices and offer to sell people’s coins at lower prices than the best available rates, in other words. It’s a less transparent approach than the alternative: stating fees clearly at the outset.

At the end of the day, customers will end up paying for crypto-trading services one way or another, whether through a fee or spread. And when crypto prices are so volatile, swinging thousands of dollars daily, does the comparatively minor fee charged by an exchange really matter?

Robinhood thinks so. “As more people get into crypto, that narrative”—the insignificance of paying a fee, especially compared to the crypto market’s typically big price fluctuations—”will fade away and there will be more price sensitivity,” Brown told me a day after her conference appearance. “It’s a factor of market pressure. When users move their dollars to a place where they can get commission-free trading, I think we’ll see the rest of the market follow.”

Robinhood hopes to pull off the same trick in crypto that it once pulled off in the stock market: Luring people with no-fee offers, stealing market share, and forcing the rest of the industry to adapt. But this time it’s already facing down fee-less rivals. And with the Securities and Exchange Commission lobbying to expand its authority to regulate crypto markets, payment for order flow coming under fire, and regulators signaling a crypto clamp-down to come, Robinhood’s magic may lose potency.

Robert Hackett
@rhhackett
robert.hackett@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

The crypto market is trending higher Thursday after several rough days where digital assets and just about everything else seemed to sell off... Twitter debuted Bitcoin "tipping"... Asset manager Invesco is working with Galaxy Digital on a Bitcoin ETF proposal... Robinhood shares popped more than 10% Wednesday after unveiling its plans to start officially testing crypto wallets... Virtu Financial wants to prove to the Securities and Exchange Commission that its execution of retail investors' stock trades is better than the alternative... The company behind NBA Top ShotDapper Labs, has raised $250 million in funding at a $7.6 billion valuation... Circle has partnered with Plaid to make it easier for people to get their hands on the stablecoin USDC... Venrock's David Pakman has joined CoinFund... Dark pools LeveL ATS and Luminex are merging... Help wanted sign for "excellent political judgment"  goes up at Coinbase... Snoop Dogg has been dropping millions on NFTs... The Philadelphia 76ers will be wearing crypto.com patches on their jerseys next season... Super Bowl winning Bitcoin bull Tom Brady would "love" to get part of his salary in crypto. 

Debits 🐻 

President Joe Biden is planning to name Saule Omarova, a crypto-critical law professor from Cornell University, as the head of the OCC... Securities and Exchange Commission Chair Gary Gensler does not see "long-term viability" for thousands of forms of money like cryptocurrencies... The world's biggest crypto exchange, Binance, is facing an expanded investigation from U.S. authorities that now covers possible insider trading... Coinbase has axed its plans for a lending product (for now) after the SEC raised concerns that it could constitute an unregistered securities offering... The Treasury Department has sanctioned crypto exchange Suex for its role in facilitating ransomware crypto payments... Financial crisis short-seller Michael Burry is still worried about passive investing... The Federal Reserve is signaling its liquidity party could soon end... The former COO of loanDepot alleges the fintech mortgage lender cut corners last year in the middle of the housing market boom.

FOMO NO MO

Crypto markets have a front-running problem. On decentralized exchanges, bots are taking advantage of slow transaction times to jump ahead of other orders, Bloomberg reported Thursday, a strategy that closely resembles the ones that many in the world of stocks alleged high-frequency traders of using for years. And it's not seeming to go away. In fact, the launch of an open source tool named Flashbots is expanding it.

From the article:

Flashbots doesn’t eliminate the shenanigans, but it tries to make them “democratic, distributed, and transparent,” in the words of Phil Daian, a Ph.D. student at Cornell Tech who’s one of the tool’s creators. He’s also the co-author of an influential paper that brought wide attention to the problem of crypto front-running and miners’ incentives to allow it. It was titled “Flash Boys 2.0,” in a nod to the Michael Lewis bestseller about high-frequency stock traders who many complained used front-running tactics.

Flashbots essentially makes a market out of cutting in line. Its auction feature lets anyone bid on a position in the queue, and miners pocket a fee from the winner. Bringing this activity out in the open and making it more orderly, the system’s creators say, can reduce strain on the Ethereum network and eliminate miners’ incentive to try dodgier tactics. Flashbots can also be used to prevent getting front-run: Traders using 1inch, for example, can use it to pay a miner to ensure their transaction gets done at the expected price.

BUBBLE-O-METER

$5,402

HFT-backed crypto data project Pyth struggled with some math this week and showed the price of Bitcoin having dropped about 90% Monday to $5,402 from its actual price that well exceeded $40,000, Bloomberg reported.

THE LEDGER'S LATEST

Two weeks later, how is El Salvador’s Bitcoin strategy going? by Chris Morris

How women think about crypto in 5 charts by Jessica Mathews

What Wall Street is saying about Monday's stock slide: 'One more brick in this wall of worry' by Declan Harty

There are new scams on mobile payment apps—and teens aren't immune by Kat McKim

What investors should worry about more than a government shutdown by Anne Sraders

Shiba Inu coin soars more than 30% on Coinbase debut by Chris Morris

Transacting more than $10K in crypto? You may soon have to report that to the government by Marco Quiroz-Gutierrez

Is a stock market correction on the horizon? by Jessica Mathews

AMC will let customers pay in Ethereum and Litecoin by the end of the year by Chris Morris

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

MEMES AND MUMBLES

"I think the steak dinner matters." 

Wall Street is getting back to partying—well, sort of. On Monday, investment bank BDA Partners' cofounder Euan Rellie hosted a 60-person dinner party where air kisses, lent-out cigarettes, and jumbo shrimp were all shared, Bloomberg's Max Abelson wrote. It was a sign of what's bound to become more frequent in the months ahead, even with the pandemic still raging on: A return to Wall Street's long-standing tradition of week-night parties and courting customers. "It's going to be an arms race again," said Livingston Capital Management founder Anthony Gellert, who made the aforementioned statement on such dinners. "Who's going to offer golf and steak dinners more than the other guy?"

This issue of Fortune’s The Ledger was assembled by Declan Harty, who you can follow here.

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