Due to the banking partner of the exchange’s decision to add South Africa to a blacklist for anti-money laundering, Kraken, a U.S. cryptocurrency exchange, has ceased taking deposits from South Africans.

Consequently, the cryptocurrency arbitrage premium, which varied between 0.7% and 1.5% in the last week of August 2023, suffered a sudden surge to 3.5%.

Due to South Africa’s non-compliance with global norms relating to money laundering and terrorism financing, the Financial Action Task Force (FATF) “greylisted” the country in February 2023, which is directly responsible for this increase.

The Kraken statement, according to Kyle Dowie, Co-Founder of cryptocurrency arbitrage firm Dooya, upset the market.

Since many arbitrage providers utilise Kraken as their offshore exchange, they are currently unable to trade as a result of the statement on Friday. Due to a decline in arbitrage trading, the premium in the market has climbed dramatically. Although Kraken has not yet provided a firm date for this, we anticipate that they will announce a new banking partner in the coming weeks or months.

The practise of “crypto arbitrage” comprises buying cryptocurrencies like Bitcoin (BTC) or a stablecoin like USDC on a foreign exchange like Kraken and then reselling them for a profit in South Africa.

The research claims that this strategy is successful because these assets often fetch higher prices in South Africa as a result of regional exchange regulations and market dynamics.

The premium margin, which is also known as profit margin, frequently rises anytime there is a reduction in trading volumes, as was the situation after the suspension of deposits on Kraken. Similar incidents are believed to have happened earlier in 2023, when Circle, the company that issued the USDC, stopped accepting payments from South Africa and other locations in anticipation of more stringent rules.

Nevertheless, a number of regional providers of crypto arbitrage were able to locate complementary approaches that allowed them to carry on trading.

We don’t use Kraken, hence it has no impact on our arbitrage services. Because so many different arbitrage firms utilise Kraken as their main trading platform for their clients, the premiums skyrocketed on Monday, according to Omer Iqbal of FiveWest, a firm that provides cryptocurrency arbitrage services.

We became concerned that this might happen again after Circle stopped accepting deposits from SA, which is one of the reasons we didn’t want to rely solely on an exchange.