Crypto Leverage Trading a ‘Major Problem’, Says Former FTX US President

Brett Harrison, the former president of FTX US, is set to roll out a new perpetual futures exchange in the coming weeks—but it won’t include markets on crypto.

In fact, the former FTX US executive told Decrypt he believes offering leveraged trading, where borrowed capital is used to multiply both gains and losses, on volatile crypto assets is “irresponsible” and becoming a “major problem.” His comments echo those from analysts who have recently raised concerns about excessive leverage in the crypto market following the flash crash on October 10, when a record $19 billion was flushed from the derivatives market.

Harrison’s new exchange, called Architect, will offer perpetual futures on traditional stocks, foreign exchange markets, and other asset classes, like rare metals. While digital assets won’t be listed on the exchange, users will be able to use some stablecoins as collateral, he said. In the coming weeks, it’ll become available to institutions, before opening to retail investors in the “intermediate future.”

Perpetual futures, or perps, are derivative contracts with no expiration date that allow users to place leveraged bets, using borrowed capital, on the direction of an asset. Traders can open long positions to bet the price of an asset will rise, or short positions to bet that it will fall, using it as a hedging strategy against risk in the spot market.

If an asset moves in the direction that favors the trader, their position will swell to the multiplier of the chosen leverage. But if the trader is wrong, their losses will also be multiplied—and in the worst case, their positions can be liquidated, or forcibly closed.

And that’s all well and good, in itself, according Harrison, who said Architect was inspired by how “extremely successful and useful” perpetual futures have been in the world of crypto. The trouble begins when exchanges offer large amounts of leverage—100 or even 1000 times a trader’s initial capital—on highly volatile markets prone to large swings, said the former FTX US exec.

“I think it’s a major problem. I think it’s irresponsible. It encourages people to blow out their accounts as fast as possible,” Harrison told Decrypt. “The point of a derivatives exchange is to allow people to safely and securely, in a long-term fashion, establish open interest. The goal is not to try to blow out accounts and collect liquidation fees. I think that is much more of a gambling platform than an actual futures trading platform.”

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