As the world's largest cryptocurrency exchanges crack down on brokerage firms that have bundled together clients to take advantage of lower trading fees, some market participants are warning the move could harm markets.

Binance was the first to prevent prime brokers from leveraging its multitiered fee system to lower their own costs and offer rebates to clients, making changes to its Link Plus interface last month. Now, OKX appears to be following suit and clamping down on access to its VIP fee program.

The exchanges say they are taking these steps to foster a level playing field for their users while ensuring they have transparency into the identity of the prime brokers' customers. Others see it as a backward step, at least from the perspective of creating more efficient markets.

Cryptocurrency markets were built for retail customers, first and foremost, and that’s why they differ so dramatically from traditional finance. In mature markets, prime brokers offer institutions the equivalent of a simple bank account, behind which an army of intermediaries safely stores cash and assets and facilitates trades at lightning speed across a range of venues. Prime brokers also provide credit, allowing traders to shuffle and change positions, with everything netted down and settled a day or two later.

Crypto’s capacity to disintermediate and deliver real-time settlement by blockchain means large participants with multiple simultaneous trades have to fund all their positions up front across a group of large, vertically integrated exchanges. Prime brokers solve that funding problem through their lending and financing component, points out George Zarya, the CEO of Bequant, a prime brokerage firm that services crypto clients.

By cutting the brokerages' access to lower fees, the exchanges may – possibly inadvertently, possibly not – be making the crypto market less attractive for them.

“Exchanges have decided that intermediaries are not necessary. They can provide loans as well, right?” said Zarya in an interview. “But they can only provide loans for the positions that are based on their exchange. They cannot provide portfolio margin, which includes your positions across the entire market. So essentially we're moving towards less capital-efficient markets.”

Large crypto exchanges are leaning towards “liquidity capture,” said Brendan Callan, CEO of Tradu, a recently launched crypto exchange owned by investment banking group Jeffries. In other words, they are creating a captive audience model, where trading volume is increased because a user has to continually get in and out of positions on that exchange.

The result is a discrepancy in bid prices on very popular and liquid pairs like BTC/USDT from one exchange to the next, Callan said. The inter-exchange discrepancies would appear “bonkers” to a conventional currency trader, he said, because liquidity providers all clear to a prime brokerage account behind the scenes so they can make markets on any other exchange.

“It means you don't have this friction of counterparty risk thresholds across all of these exchanges. But the crypto exchanges themselves are insisting on this because they want that capture,” Callan said in an interview. “They want you to have to get in and out of positions on their exchange, because it boosts their volume, but it's at a cost to the quality of their liquidity. There's not as much depth in the market behind each quote and it's very sporadic.”