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David Drake

March 29, 2018Article

Crypto Exchange Crackdown: What Does it Mean for the Nascent Cryptocurrency Industry?

Financial Services Agency (FSA) in Japan has suspended trading in two exchanges and issued orders to five other trading platforms to improve their system security. This move has come after a probe was launched into a $530 million heist on Coincheck’s crypto platform.

In the U.S, the Securities and Exchange Commission (SEC) has issued warnings to cryptocurrency exchanges claiming that they could do anything with investors’ money.

As a result of these incidences, the regulation debate rages on as governments look into ways to regulate the cryptocurrency market. The recent crackdowns have created uncertainty in the market with players eager to see what other measures financial regulators across the globe will take.

Heavy vs Light Regulation

Industry players hold different views on whether government regulation is good for the cryptocurrency industry. According to Ben Way, CEO of
Digits, the regulation debate has to be well balanced and properly reasoned.

He says, “Part of me says buyer beware but another part thinks some rational, low level discipline and regulation to the market will ultimately create a healthier market. We don’t want crypto to become the next penny stocks.”

On his part, Jay Singh, CEO of ClearCoin holds that only light regulation in the market will aid its growth.

"Light regulation can create stability and trust. Heavy regulation may stifle innovations," he says.

Nonetheless, there is consensus that some form of regulation is required to build investor and government confidence in the market.

More Crackdowns Expected

From the perspective of FSA and SEC, tokens issued during ICOs fall within their securities jurisdiction. The regulators find it necessary to protect investors from heists, hence the need to crackdown on exchanges that fail to comply with securities laws.

The regulators also point out that some exchanges do not have proper internal controls in place to safeguard against crimes such as financing terrorism and money laundering.

According to Ben Way, more crackdowns will be conducted in future because misuse of investor funds by crypto exchanges as inexcusable.

He says, “I would expect more crackdowns. In a sense, it’s amazing what some of the lower tier exchanges got away with, not for being an exchange but misuse of funds etc. That is just inexcusable in any business."

While cracking down on non-compliant exchanges is justifiable, Eugene Liebermann, CEO of
CAR token company, feels they are not the best vehicles for regulating the crypto market because they cause panic that has a negative effect.

“I am of the opinion that crackdowns always influence the market in a negative way, especially because millions of inexperienced day traders react on any news and massively sell everything they have,” he says.

Though more crackdowns are expected in the U.S and Japan, it is unclear what will happen to foreign exchanges that attract investors from these countries because some governments are yet to come to terms with the cryptocurrency market.

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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