A new generation of digital asset exchanges is emerging, but this time the guiding principle will be regulatory compliance. Exchanges offering transparency will win the trust of users and regulators, translating into the highest standards of security and superior customer service.
With over 1,500 cryptocurrencies and a market capitalisation of around $120 billion, the digital asset industry is still very much in its infancy. Yet growth in this diverse and innovative market is evolving fast. Switzerland has its own Crypto Valley, the United Kingdom boasts a vibrant fintech sector, while Singapore is considered the leading ICO hub in Asia
Exchanges – where is the oversight?
Fundamental to this fast-track development are digital asset exchanges, providing the infrastructure for trading, settlement and listing. In 2013, there were 23 digital asset exchanges. This year, at the last count, the number tops 200. According to Crypto Digest News, the biggest ones are Binance, a Singapore-based exchange; Bittrex, based in the United States, as well as Coinbase and GDAX.
I just attended the BlockShow Asia forum and amongst all the participants – thought-leaders, developers and investors – there’s a growing consensus that digital-asset market regulation is a vital next step in the evolution of this sector.
Exchanges are similar to FX markets in a way they match up buyers and sellers using a variety of basic and limit trades. They sometimes offer both fiat and cryptocurrency trading facilities and each has its own rules, coin pairing options and listings.
However, while their easy accessibility has attracted millions of retail investors, often there is no real oversight or control.
Billions of dollars are traded daily, yet many exchanges have no security procedures in place. There’s an increasing number of irregularities reports, and on top of that both clients and exchanges are at risk of being hacked. Binance stated earlier this year that hackers had attempted to manipulate the market and steal some of its users’ digital coins. Most recently, Hong Kong-based OKEx has suffered trading problems. Not only that, research from CipherTrace also found that 97% of criminal bitcoin flows into unregulated exchanges.
I spoke with Tone Vays, one of the best known cryptocurrency analysts in the world, at the BlockShow forum in Singapore. His stance on the need for regulation is unequivocal, “Most of the people that learn to trade and are good traders – the first thing they do is go to the regulatory space…A real trader shouldn’t have to worry about whether their funds are safe.”
To prevent the criminal element and encourage best practices, regulators and market players should push for further regulatory scrutiny.
Most countries have not formed laws around crypto yet, and regulators’ response is varied. But it is likely that there will be some form of legislation around digital assets in most jurisdictions at some point.
The Monetary Authority of Singapore (MAS) issued a warning in late 2017 that further legislative steps would be needed in order for cryptocurrencies to continue to grow. In June 2018, Thailand’s Security and Exchange Commission released a comprehensive framework covering ICOs, approved cryptocurrency trading pairs, and licensing fees for market operators. Regulatory initiatives to bring crypto-asset exchanges in line with anti-money laundering regulations are also underway in the European Union.
Gibraltar, however, is much further down the line. At the beginning of this year, the Gibraltar Financial Services Commission’s (GFSC) DLT Regulatory Framework came in to effect.
This means that firms in Gibraltar that use blockchain to store or transmit value belonging to others, now have to apply for a licence from the GFSC. Being licensed ensures that the exchange operator adheres to good governance and the highest security standards that independent supervision can provide. Coinfloor and Huobi have both been granted licences recently and many more are in the pipeline.
New generation exchange, fully compliant
Inevitably, legislation will have a positive impact on digital asset exchanges. It will clearly differentiate the regulated exchanges from the unregulated and will highlight serious players in the space. Rather than hinder market growth, establishing a safe trading environment will offer huge potential for the DLT market.
The Gibraltar DLT licence is a positive step and sends a clear message to potential clients that exchanges are serious about their business. Institutional investors will be able to invest on a fully regulated and trustworthy exchange with standardised products using familiar infrastructure.
By focusing on regulatory compliance, customer asset protection and IT security, this new generation of digital asset exchanges will bring the functionality and transparency that users expect from a traditional trading forex platform to the digital world, and crucially, will provide a seamless transition between digital and fiat currencies. It will be the regulated exchanges that can offer the right mix of incentives for institutional investors looking to participate in this exciting new asset class.
Contributed by Khalid Dianov, Chief Strategy Officer at BigX, a Swiss-based fintech group focused on the development of cutting-edge solutions for digital asset management.