Can Cryptocurrency Exchanges Evade Government Crackdowns?
Recently, there has been news circulating about crypto trading platforms that paint them in a rather negative light. At the beginning of the year, Coincheck, a popular Japanese exchange, lost up to $530 million after hackers accessed its system and got away with NEM cryptocurrencies. This past week, Cointelegraph reported that trading volumes in one of the largest cryptocurrency exchanges, OKEx, are largely inflated.
These and other occurrences have captured the interest of governments in different countries. Recently this month, the Financial Services Agency in Japan conducted a crackdown on cryptocurrency exchanges in which two trading platforms got suspended and five others were ordered to improve their operations.
Last August, the US Securities and Exchange Commission (SEC) released a communication warning potential ICO investors and moved to suspend two ICO companies alleging unlawful token and coin trading. At the beginning of this month, the regulator subpoenaed 80 companies.
Furthermore, the Securities and Futures Commission (SFC) in Hong Kong issued an alert warning investors about the risks posed by initial coin offerings (ICOs) and cryptocurrency exchanges. In the warning, which the agency sent out in February 2018, the SFC indicated that it had already taken action against several ICO issuers and cryptocurrency exchanges.
Following the actions taken by the US and Japan, many players in the virtual currency space expect crackdowns on virtual currency exchanges to continue.
Andrei Huseu, CEO of Wealthman, notes, “We expect that the crackdowns by the authorities will continue, although this will lead to gradual extrusion of the technology of trusted storage of assets and execution of transactions from the market.”
Last week, the largest virtual exchange by value, Binance, indicated it will be opening an office in the Mediterranean island of Malta. The crackdown on crypto exchanges have made it difficult for Binance to establish a permanent base.
Founded in Hong Kong last year, Binance opened an office in Japan and was seeking an operating license in the country. However, the company decided to close its doors and move its employees to avoid clashing with Japan’s financial regulators.
Binance is among the virtual trading exchanges that received warning letters from the SFC. in which the Hong Kong regulator instructed the crypto exchange to stop trading virtual assets as required by the country’s securities law.
But as governments intensify crypto exchange crackdowns, Huseu holds that exchanges will consolidate their pricing processes.
“From a technical point of view, exchanges will move towards centralizing the search for the best price and counterparty and decentralization of the execution of transactions and storage of assets,” he adds.
Role of Regulation
There is a feeling that regulation is required to guide the operations of cryptocurrency exchanges and ensure investor protection.
According to Todd Rowan, CEO and co-founder of Rewardstoken, such regulation will help curtail operations of ‘scammy’ exchanges while facilitating industry growth.
“Regulation is almost always required to keep the bad actors out and protect consumers. However bad regulation can kill opportunities and growth for an industry. The crypto market does not quite fit into the current regulation framework because there are components and uses that do follow tradition regulations. This is very unique technology with many use cases,” he says.
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.