Crypto Exchanges Take a United Front

Crypto exchanges—which operate much like traditional stock exchanges—are online platforms where crypto currencies are traded. Traditional exchanges deal almost exclusively with exchanging fiat, or legal tender currency, for highly regulated securities, such as stocks and bonds. Similarly, crypto exchanges primarily deal with trading one cryptocurrency for another. It is unclear which agency has, or should have, authority to regulate this arena because these exchanges primarily trade one currency for another. Regulating crypto exchanges is difficult because of the subtly different and often overlapping definitions surrounding initial coin offerings (ICOs) and cryptocurrencies (Michael del Casillo, Forbes). The unprecedented growth and increasing number of new crypto exchanges and cryptocurrencies is another factor making unified regulation increasingly difficult.

Despite only fourteen cryptocurrencies being available in June 2013, CoinMarketCap now reflects over 1,900 available cryptocurrencies. Although certain currencies are only available on select exchanges and many exchanges are only available within certain countries, there were over five hundred crypto exchanges in operation as of April 2018. (Kai Sedgwick, Bitcoin). Crypto exchanges establish currency rates, which are largely based on the cryptocurrency's trading volume and demand present on the exchange itself. This unregulated, exchange-specific pricing structure—in addition to other minor factors—commonly results in price variances ranging from one to five percent between exchanges (Kira Egorova, Cointelegraph). The lack of regulation in crypto exchanges also makes them vulnerable to a variety of “black swan” events, such as hackers, bugs, and rogue employees. Due to this vulnerability, cautious traders often store their holdings in offline wallets and move funds to an exchange just long enough to place trades (William Peaster, Blockonomi). While a multitude of investors appear undeterred by this extreme volatility and absence of regulation, many institutional investors, among others, remain apprehensive (Jordan French, TheStreet).

When deciding how best to regulate the world of cryptocurrencies, there is no shortage of ideas or competing philosophies. But several noteworthy ideas seek to establish a united front, which focus on adapting current financial regulations instead of trying to reinvent the wheel. For example, the Jibrel Network proffers that integrating the current financial industry with blockchain technology could “usher in an era of smart regulation” in which people could place their “trust in code rather than in institutions.” (Id.) A single agency, however, may lack the authority and resources necessary to effectively regulate a financial sector which prides itself on decentralization. Accordingly, regulators from the SEC, FINRA, and the CFTC have begun coordinating their investigations and increasing interagency cooperation as it relates to regulatory action (Michael del Casillo, Forbes).

Some crypto exchanges also have banded together to self-regulate and bring order to what is currently referred to as “a Wild West for market manipulation, fraud, and money laundering” (Lydia Beyoud, Bloomberg BNA). One such coalition is the Virtual Commodity Association (VCA). Currently comprised of four larger exchanges, with Gemini taking the lead, the VCA seeks to develop and strengthen regulations throughout the digital asset industry, including reducing volatility and increasing market transparency. In line with these objectives, their sights for the future are set on obtaining approval from the SEC to establish a bitcoin-based exchange-traded fund (ETF). (Id.)

With multiple institutions and exchanges, such as NASDAQ, anxious to embrace the cryptocurrency market, the question regarding future regulation appears more a matter of when rather than if (Kate Rooney, CNBC). Larger groups, such as Germany’s Central Bank, believe a movement towards global regulations of both cryptocurrencies and their exchanges is the only way to effectively regulate this recent financial phenomenon. Despite the potential wisdom in this approach, many countries have drastically different opinions on how the crypto market should be dealt with. For example, while Japan is among its largest supporters and has even given Bitcoin currency status, other countries, such as China, are in active opposition and have started banning ICOs and crypto exchanges. Ultimately, while the future will almost certainly see increased regulations within individual countries, the existence of such wildly divergent views surrounding the crypto market will make developing and implementing globally accepted regulations difficult, if not impossible (Darryn Pollock, Cointelegraph).