CoinMarketCap x Binance : What would happen when the benchmark administrator… would be the data provider?
As you read in our latest article, Binance is about to acquire for $400 million CoinMarketCap. The first is one of the most important exchange platforms of cryptoassets. The second is a crypto market data provider, publishing prices for cryptoassets traded on platforms, such as Binance. This operation can be analyzed on the marketing side, because CMC can be considered more as a crypto website built to maximize traffic and advertising profits. In that way, this announcement seems logical.
However, if you consider that CMC can be a professional-grade data provider, such an acquiring necessarily raises questions. It invites us to question the transparency of the cryptoassets market. More particularly, it reminds us that the absence of independence between a financial data provider and a benchmarks administrator can lead to risks of manipulation and conflicts of interest in the governance of interest rates, such as the “Libor” interbank rate scandal in the years 2010.
What would be the impact of this announcement in the crypto market, if we no longer admit CMC as a content provider, but as a reference rates provider?
It seems like a “deja vu”: remember Libor…
Cryptoassets market suffers from an intrinsic difficulty: the price calculation is based on transactions data received from the trading platforms’ APIs. Today, this calculation is mostly performed by data providers, who aggregate such data to give a more or less accurate financial representation of the price of a crypto asset. It implies a calculation method based on an objective selection of the input data. But in the case of Binance and CMC, how could this selection be objectively made, when the benchmark provider is also the contributor of these rates? Is there not a clear risk of bias by CMC with regard to the Binance data? How can it be ensured that the price announced by CMC would not be subject to any kind of influence by Binance?
This risk of data manipulation is reminiscent of the Libor’s (London InterBank Offered Rate) and Euribor’s (the European equivalent) interbanks rates scandals, which broke out in 2012. For the record: these are the rates by which banks refer when they lend money to each other. The setting of the rate depends on the participating banks providing information on their individual refinancing rates. An agency (in this case the British Banker Association) was then responsible for aggregating all this information to calculate the reference rate (each morning, the calculation agent, Thomson Reuters, throws out the highest and lowest 25 percent of submissions and then averages the remaining rates to determine Libor). However, since 2012, several colluding banks were prosecuted for manipulating interbank rates by providing distorted data. The manoeuvre: reporting artificially low or high-interest rate, in order to make profits with their derivatives traders. Libor was used to offers a reference rate for many instruments in both financial markets and commercial fields. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. So the larger the change in the market and the more advantageous it was to the fraudulent players, the greater the profits were.
In 2017, nearly $350 trillion were based on interbank rates such as Libor. This tells us that the provision of reference rates can have a considerable systemic importance. This is especially true when the financial instruments’ calculation and the funds investments’ performances rely on estimate an average based on numbers provided in a declarative manner without the capacity to be audited. At this point, it should sound familiar to you because that’s exactly how CMC prices are defined.
You said “regulation”?
Recently, the SEC replied to a Bitcoin ETF proposal by pointing out once again concerns about market manipulations and a serious need for surveillance-sharing agreements with exchanges. Several proposals like Bitwise attempt have already been refused for same reasons. The regulator do its job by anticipating the lack of common regulation for operators providing data to the crypto market and financial risks associated, such as those caused by collusion comparable to the Libor scandal. Moreover, it was this kind of observation that led the EU and the IOSCO back in the days to set up mechanisms in order to regulate the practice of calculating and promoting benchmarks.
The European Parliament and the Council established the Benchmark Regulation (hereinafter “BMR”) in 2016. Its main purpose is to require the benchmarks administrators (e.g. data providers) as well as the contributors of input data (in this case, exchanges) to comply with a set of rules on the governance of the rates. Moreover, it requires the operators to be clearly separated in order to distinguish their own role : input data contribution, calculation agent service, benchmarks administration. This way, it’s easier to prevent from any conflict of interests risks and calculation manipulation. The “BMR” regulation increases the transparency and integrity of the provision of reference rates through the implementation of compliance measures. It encourages market players to apply best practices consistently, thereby increasing confidence in the use of such rates.
Does CoinMarketCap owe any responsibility to the crypto market?
Users have always complain about the CoinMarketCap’ total lack of transparency. But this acquisition by Binance add fuel to the fire of those historical concerns. On the one hand, Binance is a major exchange and offer perpetual futures since septembre 2019. Then, it could reasonably be classified as an input data contributor. On the other hand, CMC provides a professional API for financial purposes, based on exchange contribution. So, it could be considered as a benchmarks administrator. In this hypothesis, if we consider both CMC and Binance comply with BMR classification, risk of bias in the crypto prices administration (manipulated by the provision of truncated input data) could be possible by such a merger. Indeed, it would involve a lack of separation between the contributor and the rate calculation agent. In the 2010s, despite the banks and the calculation agency were independent of each other, it could not avoid the rate manipulation; you can guess what could happen with the CMC & Binance alliance.
Finally, two main lessons can be learned from this episode:
First, precautions must be taken by various operators of crypto rates calculation, both in terms of transparency of the methodology and the management of potential conflicts of interest. These precautions are based on a set of rules and standards relating to risk management. It would therefore seems desirable for this market to be brought into line with traditional financial regulations. Otherwise, the transparency of such a market, however expansive, could be nipped in the bud.
Then, it shows us that the crypto market maturation must relies on professional services which comply with the aforesaid rules and standards. Services which can guarantee organic separation in benchmark and reference rates administration. And this is precisely why we created Koinju: to provide professional, transparent and confident calculation services fitted for financial needs.
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And with all that in mind, switch to https://koinju.io/ for your crypto data!
