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

Many cryptocurrency exchanges at the moment are making proud claims about their regulated standing, however does “regulated” actually imply what traders suppose? Martin C.W. Walker and Winnie Mosioma evaluate 16 main exchanges to seek out out.


Cryptocurrency exchanges have lengthy been topic to controversy, largely in relation to the quite a few incidents of hacking and points associated to anti-money laundering controls. Regulatory focus, nonetheless, is slowly turning to their core exercise, buying and selling. In March 2021, the Commodity Futures Trading Commission (CFCT) issued an order submitting and settling prices (together with a $6.5 million settlement) towards cryptocurrency alternate Coinbase for “reckless, false, misleading, or inaccurate reporting in addition to wash trading” on its GDAX platform. Other main cryptocurrency exchanges investigated for his or her buying and selling practices embody Bitfinex and Binance.

Conventional platforms for buying and selling securities, overseas alternate, derivatives, commodities and different extra typical monetary property are strictly regulated, whether or not they’re formally categorised as exchanges or various buying and selling methods (ATS). An ATS, whereas not strictly a inventory alternate, has to observe the rules that apply to both alternate or broker-dealers relying on a quantity of standards (various between jurisdictions), reminiscent of the quantity of trades and market share. Whatever the classification, typical buying and selling platforms must observe strict guidelines designed to guard traders and keep away from destabilisation of the monetary system. Particularly guidelines that require a excessive degree of transparency and guaranteeing operational resilience.

A basic flaw within the design of Satoshi Nakamoto’s infrastructure for the unique cryptocurrency, bitcoin, was the shortage of any apparent approach to interface it with present monetary infrastructure; notably to facilitate the alternate of bitcoin for typical currencies reminiscent of {dollars}, kilos and euros. A spot that didn’t exist in bitcoin’s digital forex predecessors, e-gold and the Liberty Reserve greenback. Both of which had networks of unbiased exchanges from the outset and each of which have been closed down following authorized and felony prosecutions. It took 18 months from bitcoin’s going reside to the creation of the primary unbiased alternate,, which allowed bitcoin to be traded for {dollars}. Unlike Liberty Reserve or e-gold, bitcoin (as a forex slightly than a platform) was not linked in worth to any real-world asset. This meant cryptocurrency exchanges didn’t simply alternate cryptocurrency and traditional forex for a charge, they needed to facilitate the buying and selling between a number of events to determine costs, like a inventory alternate.

Given the basic position performed by cryptocurrency exchanges within the total crypto ecosystem and the rising diploma of entanglement between crypto and traditional finance, you will need to not simply perceive whether or not crypto exchanges are regulated however how they’re regulated. To perceive the present image of regulation, we carried out a qualitative evaluate of 16 main exchanges (see Table 1) together with the seven that contribute costs to the CME Bitcoin Reference Rate, which benchmarks the day by day value of one bitcoin in US {dollars} and is used to calculate the costs of bitcoin futures on the Chicago Mercantile Exchange, an exercise regulated by the Commodity Futures Trading Commission (CFCT).

The evaluate uncovered a patchwork of regulation and, in some circumstances, its full absence. Leading exchanges recognized from the March 2021 rating discovered at embody: Coinbase, Binance, Gemini, Bitstamp, Kraken, itBit, Luno,, Liquid, LMAX Digital, Bitfinex, eToroX, Bitflyer,, Bittrex, OKCoin. Identifying the regulatory standing of these platforms typically proved difficult given their advanced company constructions. Of the 16 main platforms investigated, simply 4 have been discovered to be topic to a vital degree of regulation associated to buying and selling.

itBit, a US-based alternate with an estimated day by day buying and selling quantity of virtually $12 million (one of the smaller exchanges), is arguably probably the most safe, with oversight from the New York Department of Financial Services (DFS) and registration as a financial institution. This implies that the alternate is subject to the provisions of the US Bank Secrecy Act (BSA), the US Patriot Act, and the General Regulations of the Banking Board. eToroX and LMAX Digital function as multilateral buying and selling methods, are below the supervision of the German Federal Financial Supervisory Authority and the UK’s Financial Conduct Authority (FCA) respectively. However, the basic cause for that supervision associated to extra typical actions in FX and equities, slightly than cryptocurrencies. Belarus-based alternate is topic to complete controls on transaction reporting, suspicious exercise monitoring, AML necessities, and even truthful promoting guidelines, which are on par with Belarusian-domiciled securities alternate companies. Belarus, although, will not be precisely a main monetary centre.

Seven of the remaining exchanges function as licensed Money Service Businesses (MSBs) or equal – together with the ever present Coinbase. This implies that they need to register with the Financial Crimes Enforcement Network (FinCEN) within the US, and/or the Financial Conduct Authority (FCA) below the Payment Services Regulations 2017 within the UK. It doesn’t imply their buying and selling actions are regulated.

At the opposite finish of the spectrum, three of the highest exchanges seem to not be topic to any regulatory scrutiny in any way. The Liechtenstein-domiciled Bittrex, Singaporean Luno, and British Virgin Islands-based Bitfinex are unregulated entities and are usually not licensed by any main worldwide our bodies. This is although Bitfinex suffered a hack in 2016 which led to the loss of some $72 million in bitcoin. The occasion led to the handing down of an order by the United States Commodity Futures Trading Commission (CFTC), which notably was not succesful of compelling Bitfinex to take any affirmative motion.

While registration of exchanges might give traders some consolation, the main focus of the regulators is mostly on anti-money laundering (AML) and due diligence measures – not buying and selling. In the UK, cryptocurrencies are only regulated for money laundering purposes, and there’s no wider framework governing the actions of alternate platforms, besides the place they cross the road into different areas of regulated monetary exercise.

Many of these exchanges additionally proudly promote their possession of a distributed ledger technology licence from the Gibraltar Financial Services Commission. This is heralded as a mark of legitimacy and respectability by the likes of, however in observe there seems to be little or no by method of ongoing scrutiny as soon as authorisation has been granted.

Given the shortage of vital regulatory oversight of precise buying and selling exercise it’s in all probability no shock many cryptocurrency exchanges perform questionable actions, reminiscent of providing leverage to their purchasers and wash buying and selling, all towards a context of unexplained system outages throughout occasions of market instability. Reasons for regulatory intervention within the typical world. Few train any type of mitigation towards market abuse, whereas some have even been accused of buying and selling towards their purchasers in what economist Nouriel Roubini has in comparison with a on line casino vendor betting towards a gambler whose playing cards they’ve seen.

Cryptocurrencies now type a main asset class with a notional worth of $1.77 trillion as of March 2021, with investments being made by publicly listed firms reminiscent of Tesla and MicroStrategy and a larger willingness of main monetary establishments to supply cryptocurrency associated companies. However, the regulatory framework inside which it exists is extremely regarding. In common, cryptocurrencies lack anybody that’s genuinely accountable for core processes reminiscent of transfers of possession, commerce validation and creation of cryptocurrencies. A priority that may finally solely be handled by acceptance of the scenario or outright bans. However, the just about full lack of regulation of the extremely centralised cryptocurrency exchanges ought to be an easier-to-fill hole. Regulated entities counting on costs from “exchanges” for accounting or calculation of the worth of futures contracts are clearly placing themselves at vital danger. At least till cryptocurrency exchanges are topic to the identical regulatory oversight as different monetary markets.

Table 1. Regulation of main crypto exchanges



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