Best Cryptocurrency Exchange

Regulated cryptocurrency exchanges: sign of a maturing market or oxymoron?

Regulated cryptocurrency exchanges: sign of a maturing market or oxymoron?
Written by publisher team

Many cryptocurrency exchanges are now making proud claims about their regulated status, but does the word “regulated” really mean what investors think? Martin CW Walker And He’s guilty of Mosiom Check out 16 leading exchanges to find out.


Cryptocurrency exchanges have always been the subject of controversy, especially with regard to numerous hacking incidents and issues related to anti-money laundering controls. However, the organizational focus is slowly shifting to their primary activity, which is trading. In March 2021, the CFCT issued a filing and settlement fee request (including a $6.5 million settlement) against cryptocurrency exchange Coinbase for “reckless, false, misleading or inaccurate reporting as well as trading laundering” on GDAX. a program. Other leading cryptocurrency exchanges investigated for their trading practices include Bitfinex and Binance.

Traditional platforms for trading securities, foreign exchange, derivatives, commodities, and other traditional financial assets are strictly regulated, whether they are officially designated as exchanges or alternative trading systems (ATS). Although ATS is not strictly a stock exchange, it does have to follow the regulations that apply to the exchange or dealing brokers depending on a number of criteria (which vary between jurisdictions), such as trade volume and market share. Whatever the rating, traditional trading platforms must follow strict rules designed to protect investors and avoid destabilizing the financial system. In particular the rules that require a high level of transparency and the guarantee of operational flexibility.

The primary flaw in Satoshi Nakamoto’s infrastructure design for the original cryptocurrency, bitcoin, was the lack of any clear way to interact with the existing financial infrastructure; Especially to facilitate the exchange of Bitcoin for traditional currencies such as the dollar, the pound and the euro. A gap that did not exist in the forebears of digital bitcoin, e-gold and the reserve dollar Liberty. Both had networks of independent exchanges from the start, and both were shut down after criminal and judicial prosecutions. It took 18 months from the start of the bitcoin business to the creation of the first independent exchange, bitcoinmarket.com, which allowed bitcoins to be traded for dollars. Unlike Liberty Reserve or e-gold, Bitcoin (as a currency rather than a platform) is not tied to any real-world asset in terms of value. This means that cryptocurrency exchanges not only exchange cryptocurrency and traditional currency for a fee, but also have to facilitate trading between multiple parties to set prices, such as an exchange.

Given the fundamental role that cryptocurrency exchanges play in the overall cryptocurrency ecosystem and the increasing degree of intertwining between cryptocurrency and traditional finance, it is important to understand not only whether cryptocurrency exchanges are regulated but how they are regulated. To understand the current picture of regulation, we conducted a qualitative review of 16 leading exchanges (see Table 1) including the seven that contribute prices to the CME benchmark bitcoin price, which measures the daily cost of one bitcoin in US dollars and is used to calculate bitcoin futures prices on the CME , an activity regulated by the Commodity Futures Trading Commission (CFCT).

The review revealed a patchwork of regulation and, in some cases, the complete absence of it. Leading exchanges identified from the March 2021 rating found on Cryptocompare.com include: Coinbase, Binance, Gemini, Bitstamp, Kraken, itBit, Luno, Cex.io, Liquid, LMAX Digital, Bitfinex, eToroX, Bitflyer, Currency.com, Bittrex and OKCoin. Determining the regulatory status of these platforms has often proven to be challenging due to their complex institutional structures. Of the 16 leading platforms examined, only four were found to be subject to a significant level of regulation related to trading.

ItBit, a US-based exchange with an estimated daily trading volume of $12 million (one of the smallest), is arguably the safest, with the New York Department of Financial Services (DFS) oversight and registration as a bank. This means that the exchange is subject to the provisions of the US Banking Secrecy Act (BSA), the US Patriot Act, and the General Banking Board Regulations. eToroX and LMAX Digital operate as a multilateral trading system, and are supervised by the German Federal Financial Supervisory Authority and the United Kingdom’s Financial Conduct Authority (FCA) respectively. However, the main reason for this oversight has to do with more traditional activities in forex and stocks, rather than cryptocurrency. The Belarus-based Currency.com exchange is subject to extensive controls on transaction reporting, suspicious activity monitoring, anti-money laundering requirements, and even fair advertising rules, which are on par with Belarus-based stock exchanges. However, Belarus is not specifically a leading financial center.

Seven of the remaining exchanges operate as licensed financial services companies (MSBs) or equivalents — including the ubiquitous Coinbase. This means that they must register with the Financial Crimes Enforcement Network (FinCEN) in the US, and/or the Financial Conduct Authority (FCA) under the Payment Services Regulations 2017 in the UK. This does not mean that their business activities are regulated.

At the other end of the spectrum, it appears that three of the largest exchanges are not subject to any regulatory scrutiny whatsoever. The Liechtenstein-based Bittrex, Singaporean Luno and Bitfinex companies are unregulated entities and are not authorized by any major international bodies. This is despite the fact that Bitfinex suffered a hack in 2016 which resulted in the loss of about $72 million worth of bitcoins. This event led to the delivery of an order by the US Commodity Futures Trading Commission (CFTC), which was not particularly able to force Bitfinex to take any positive action.

While listing exchanges may give investors some relief, the focus of regulators is generally on anti-money laundering (AML) and due diligence – not trading. In the UK, cryptocurrencies are only regulated for money laundering purposes, and there is no broader framework governing the activities of exchange platforms, except where they cross the line into other areas of regulated financial activity.

Many of these exchanges also proudly announce that they have a distributed ledger technology license from the Gibraltar Financial Services Authority. This is heralded as a sign of legitimacy and respect by the likes of Cex.io, but in practice there seems to be very little ongoing scrutiny once permission is granted.

Given the lack of significant regulatory oversight of actual trading activity, it is likely not surprising that many cryptocurrency exchanges conduct questionable activities, such as offering leverage to their clients and laundering trading, all in the context of unwarranted system outages in times of market instability. Reasons for organizational intervention in the traditional world. Few exercise any form of mitigation against market abuse, while some have even been accused of trading against their clients in any economist. Nouriel Roubini He compared a casino dealer betting against a gambler who saw his cards.

Cryptocurrencies now constitute a major asset class with a notional value of $1.77 trillion as of March 2021, with investments being made by publicly listed companies such as Tesla and MicroStrategy and a greater willingness by major financial institutions to offer crypto-related services. However, the regulatory framework in which it exists is very worrisome. In general, cryptocurrencies lack anyone who is truly responsible for the basic processes such as transfers of ownership, verification of trade, and creation of cryptocurrencies. An anxiety that can ultimately only be dealt with by accepting the situation or outright ban. However, the almost complete lack of regulation of the highly centralized cryptocurrency exchange should be a gap that is easy to fill. It is clear that regulated entities that rely on prices from “exchanges” to account for or calculate the value of futures contracts expose themselves to significant risks. At least until cryptocurrency exchanges are subject to the same regulatory oversight as other financial markets.

Table 1. Regulation of Leading Cryptocurrency Exchanges

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Notes:

  • The publication gives the opinions of its authors, not the position of LSE Business Review or London School of Economics.
  • Featured image by Pierre Portery on Unsplash
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