In the competitive world of cryptocurrency exchanges, volume is everything. As a result, crypto exchanges have found various — let’s call them ‘creative’ — methods to pump up their stats. Universal fee-free trades, negative rates for market makers, elaborate referral programs, counting both sides of the same trade as two, blatantly concocting data, and even hiring market makers to constantly increase the number of transactions — the industry is rife with exhaustive measures to pump up artificial volume.
If these methods seem dubious, their want of propriety pales in comparison to the new kid on the block: trans-fee mining. Supposedly invented by former Huobi CTO Zhang Jian, this model directly rewards users for generating transactions with the exchange’s issued tokens. The economics is simple: more users = more tokens issued = more use of tokens = increase in value of tokens = more users. You get the picture.
A House Divided
A number of exchanges are jumping on the bandwagon, including Singapore’s Coinbene and Hong Kong’s OKEx, which is now launching a program that will help 100 new crypto exchanges to adopt the trans-fee mining model.
Critics argue that this is really an ICO in disguise. In their white paper, crypto exchange FCoin states that 51% of their FT token is public and 49% is held by FCoin and its investors. However, instead of the usual public offering, that entire 51% goes to FCoin’s users who make trades on their platform. For every transaction fee a user pays to FCoin in the form of bitcoin or ethereum, the platform will reimburse the user 100% of the value in FTs.
Bit-Z, another major exchange that has jumped the charts recently, claims on its website that they do not publicly raise funds from investors. Similar to FCoin, Bit-Z contributes 50% of their native coin BZ to its “global partner’s share of dividend distribution” — a windy way of saying “trans-fee mining”.
They write: “Bit-Z has its own pace and style and is very confident about the future development prospects. We believe that all exchanges will have very good breakthroughs and developments. We agree with the win-win mechanism.”
They sound pretty confident, but should we be?
Trans-fee mining essentially allows exchanges to manipulate the price of their own coin. Add to it all the other ploys already floating around the datapool, and it makes for a rather disillusioning perception of the market. Binance founder and CEO Zhao Changpeng wrote on his Weibo account:
“You pay transaction fees to the platform with BTC and ETH. Then the platform pays ‘100%’ back to you with its token. Isn’t it just buying [the] platform token with BTC and ETH? How is this different from an ICO?”
The real issue here is the nature of the ecosystem in which the tokens are being used. Because this technically isn’t an ICO, there is no need to classify the kind of coins being distributed. But the tokens are arguably a form of dividend-bearing securities, effectively offering control in the exchanges themselves.
Know Your Token
The big dichotomy in token economics is the difference between a utility and a security. In this industry, the two are butted against each other where the line between intended use and actual use can become a tangled blur. The simplest explanation of a utility is that it serves as present or future access to a product or service. A security, on the other hand, is an investment contract where the only reason for contributors to buy the token is the anticipation of future profits in the form of dividends (a payment made by a corporation to its shareholders) or, most commonly in crypto economics, price appreciation.
So why all the fuss? Well, Bitcoin is technically a utility. But it’s unlikely you’ll ever see your average Joe buying a cup of coffee with BTC because chances are, he’ll be kicking himself six months down the line when that same amount can buy him a car. You know the pizza story.
So in reality, Bitcoin is being used as a security. The janus-faced nature of most cryptocurrencies is a serious problem from a legal perspective. Securities laws have been developed over decades, meaning that security tokens automatically inherit a cornucopia of legal precedents that define token buyer rights, protections and expectations. They also come with a litany of duties and obligations of the issuer. Most ICOs desperately try to avoid classifying their tokens as securities because of all the extra regulations on who can invest in these tokens and how they can be exchanged.
If I weren’t writing on such a respectable platform, I’d sum it up by saying most ICO issuers are lazy and can’t be bothered to filter who brings in their bacon.
And we care, because?
The classification concern is important because how a token is defined influences the relationship between its issuers, its users, and the entire crypto ecosystem which enables that token to exist. How sustainable is a network that profits solely from the price of its own token? Would it survive if volume were purely organic? Is the controversial model of trade-fee mining even an issue, or just another complex yet perfectly legitimate way to chase success?
These questions throw light on just how murky the waters of crypto economics actually are. At the end of the day, exchanges like Bit-Z, FCoin, Coinebene and OKEx will never have to answer in this debate because security token or not, covert ICO or trade fee structure, artificial or organic, they are not regulated. And when you’re not regulated in this industry, anything and everything goes.
I’d like to see more exchanges taking a stance on these issues. The crypto industry is new enough for regulators, corporations, and customers to have a say in where we go from here. Remember that this ultimately is a financial services industry. We’re managing people’s hard-earned money. We have a responsibility to cultivate a transparent, secure and value-driven ecosystem. If we cannot agree on this, then we must accept the hacks, scams and downright deception that increasingly characterizes the industry. I don’t know about you, but this is not the “future of financial services” I had in mind.
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