Collusion! The Unholy Trinity of “Institutional” Cryptocurrency Market Actors

I recently had the chance to read the Medium Post by Nic Carter titled The Dark Underbelly of Cryptocurrency Markets, where Nic provided a tell-all about the crony conflict-of-interest that exists between coin creators, coin rating sites, and coin exchanges. If you haven’t checked out the article yet, I recommend you do so now, as I’ll be touching up on only a few of the points delivered in the article (although the entire thing is well-done).

In the article, Nic discusses that retail investors get the short end of the stick when it comes to making informed decisions about coin legitimacy in a similar fashion to betting against the house at a casino. Understanding that the community has already written off exchanges and coin creators as potentially dubious actors that must be properly investigated, he discussed that coin ranking sites still have yet to be attract attention from regulatory bodies and financially investigative enthusiasts despite the same lack of legitimacy as the other two. Between listing fees, adsense, referral links, and wash trading, economic incentives point these three market actors toward quantity-based rather than quality-based decisions regarding onboarding coins (at the expense of retail investor ability to properly assess the market).

Regulatory Oversight Lacking

The article opened my mind to new considerations regarding regulatory involvement required for cryptocurrency trading be deemed relatively “safe” from bad actors.

With regard to the creation of new altcoins, the incentivization of this for all market actors (coin creators, coin rating sites, and coin exchanges) certainly raises red flags. While the controversy around ICO creation has been the hot topic of the past two years, one equally compelling dynamic that doesn’t receive the same press is that of coin hard forks. With the recent slew of Bitcoin and Ethereum hard forks, who’s to say that there wasn’t blatant bribery going on with exchanges convincing prospective new strains of coins to fork so that there would be listing fees paid and higher coin volume on the exchange, not to mention potential exchange exclusivity and insider trading (see: Coinbase-BCH hard fork controversy).

One point Nic had brought up was the ability for these coin ranking sites to sell blended price APIs to more sophisticated investors providing them faster access to price fluctuation changes. While I’m no expert on market trading, this doesn’t feel to me that it would be legal in a conventional market, given that at any point in time some investors would be viewing the incorrect price while other investors would be viewing the correct price. He had also mentioned that there was big money to be made by putting scam coin banner ads on the coin ranking sites (and just the same this needs to be done away with).

Exchanges outside of the national jurisdiction, helmed by anonymous individuals, is just a recipe for disaster. The amount of potential opportunity for legal infringement and lack of transparency to retail investors overall is perhaps one of the greatest inhibitors for mainstream adoption of cryptocurrencies, even moreso than coin exploits. Who’s to say which of these supposed exchange hacks weren’t staged? It’s certainly not a new theory (see: MtGox). That’s just one of the many ways that exchanges have the power to defraud investors (not to mention the tax authorities).

CryptoMarkets 2.0

Ok so what do we need to make the system reliable?

To start, know-your-customer protocol on every front: retailer investor, coin governance, developers, miners, coin ranking sites, exchanges, 3rd party broker-dealers, everyone interested in being a part of the ecosystem. This policy would stand in stark contrast to what we have now (as well as GDPR, privacy laws etc…), which would bode serious problems for those who want to contain their information. Perhaps then we could get into discussion over the merits of zero-knowledge proofs, ZK-STARKs and other data structures that serve to validate data but not release it. But I believe KYC to be the most critical component needed for this ecosystem nonetheless (time to hold people accountable!).

Next we have coin issuance. ICO regulation still has a way to go and I’m not going to get into thoughts on that at the moment, but I know for forks there needs to be some serious overhaul in the way that these are done for public ledger PoW coins. There’s too much reliance on the forkers’ capability of assessing the merits of creating a new brand of coin with the detriment of unforeseen market impact. By the way, whose job is it to keep track of a cryptocurrency’s supply anyways? I’ve always wondered how to determine the quantity of coin (especially for pre-mine coins), and that there could be serious technocrati conflict-of-interest for the developers to hyperinflate the coin unbeknownst to the current and prospective investors. Sufficed to say that all of this needs to be under lock-and-key by the regulators. Figuring out how to distribute regulatory control to countries across the globe is another day’s assignment.

Onto coin ranking sites. If the owners are KYC’ed, and there are (multiple) coin ranking sites per national jurisdiction, I don’t see too much of a hang-up. Laws can vary on the coin ranking sites by country, but I’d recommend something to the effect of decoupling allegiances between exchanges & coin issuers, establishing a system of fines for punitive action, delisting/deadvertising scam projects, and providing equal mission-critical data to all retail investors simultaneously.

For exchanges, if we have consistently updated KYC in place for all of the exchange owners and traceable deposits/withdrawals, we should be able to have sufficient checks in place for exchanges to operate outside the exchange geopgraphical jurisdiction assuming the proper extradition laws are in place for that country. In addition, throw a bunch of regulators at each exchange to regularly manage it in case a “glitch” happens to leave some investors empty-handed.

Bunch of Different Directions Ahead

All in all, I think the coin uses are going to be decoupled over time, and models will need to be custom-fitted for each one. A universal cryptocurrency standard for cross-border transactions will for instance not want to have erratic price or quantity fluctuations and will need coin governance and development upkeep to be overseen by a global authority of representatives from every country. For speculative cryptocurrency standards, we need to snuff out the biggest chokepoints of potential corruption, and while KYC will aid considerably in that effort, regulatory systems will need overhaul to best foster global cooperation. As well tokenized assets, tokenized securities, and (alleged) utility tokens will need systems surrounding them.

While this article is posted here, it’s posted elsewhere as well. In an effort to create a cross-platform discussion, I invite you to expand on any thoughts you have here in the comments as well as over on treadie, which is very much a microcommunity twitter. The reason I use treadie is because (1) it’s free, signup only with Facebook or Twitter; (2) you don’t get the walled garden of only one platform comment section, instead combining everyone for discussion. Link:

Distributed Ledger Consultant; Working toward bringing together DLT within the social, investment, and regulatory realms.

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