Is it time to regulate cryptocurrency exchanges? Best Crypto Exchange |Medium
As the crypto space matures, regulation becomes more important and more of a hot topic. Regulation is particularly important when exchanges are concerned. So, let’s talk about cryptocurrency exchange regulation. In this piece, we will explain what exchanges are and why, in our opinion, well-thought-out regulations are a good thing.
What is a cryptocurrency exchange?
An exchange is any company that facilitates trades in one way or another. Companies that act as ‘public’ exchanges (such as Binance and Bittrex) are exchanges with open order books. An order book is a public list of current bids and asks, showing the prices at which traders are willing to buy and sell specific coins.
On the other hand, there are organizations like Shapeshift, various dark pools, and OTC desks which facilitate transactions privately; these entities have no public order books containing bids and asks.
From a legal standpoint, the main takeaway is that all exchanges have the responsibility to uphold an honest environment since they actually hold everyone’s money. This means users trust that balances are accurate and that the exchange can technically handle large amount of orders per second while offering high security from cyber attacks.
In many ways, regulations can help provide protection to users.
Why are crypto regulations a good thing?
Now that we know what exchanges do and understand the responsibility they have to uphold, we can dig in to why proper regulations can be a positive step forward. We will primarily emphasize financial laws rather than technology laws, which can hurt innovation.
Let’s discuss some social and financial actions that occur on crypto exchanges that are rightfully illegal in traditional finance:
- Fake volume
- The issue: Exchanges show trading volume. They show the volume for specific trading pairs and for the exchange as a whole. Volume is the amount transacted; every time a bid or ask order is filled, it adds to the total volume. In ‘traditional’ finance, it is not legal to buy and sell in to your own orders. This is ‘faking’ volume and inflates the number shown by the exchange. Traders can then mistake this inflated volume as a metric for organic interest in a project, which might persuade them to invest when they might not otherwise.
- The law: Exchanges should be subject to audits. It should not be allowed for any account to buy or sell into their own orders.
- Pump and dumps
- The issue: Faking volume is one tactic, but any exchange that offers a forum, often called a ‘trollbox,’ is also subject to having people fraudulently praise a coin with the hopes that people will buy said coin. Then, when new buyers cause the coin’s price to rise, the people that praised it sell. In the end, buyers are left bag-holding a worthless coin. Hence, pump and dump. Any trustworthy, regulated exchanges will not have a trollbox. They hardly ever help traders in an honest way.
- The law: Trollboxes should not be allowed and exchanges should not be able to promote projects.
- Fake identities and multiple accounts:
- The issue: Unless exchanges are accountable for the users they onboard, then they will continue to be loose about who can create an account. This means that someone may be able to create an account on exchange with a fake name and get approved to fund their account. As a result, they may try hacking the exchange, attempt to avoid taxes, or use their account as protection for pump and dump schemes. Also, there is no way an exchange can be properly FDIC insured if users can sign up so easily with little verification of identity. It is important to know your customer and effectively report user activity as needed. This certainly hurts the public and takes away from professionalism.
- The law: There needs to be proper KYC and AML guidelines for all users that wish to create accounts.
What are difficulties of cryptocurrency exchange regulations?
As explained above, standard regulations can directly protect people from financial schemes. Still, it is important to stress the fact that we do not condone rushing into regulation. While there certainly should be regulations to stop fake volume and virtually all other actions that can facilitate pump and dumps, there are more intricate legal aspects to keep in mind that can stifle innovation.
First, it would be nice if exchanges could freely add whichever project they feel is worthy. This means that the government should take their time in classifying different token assets. Some projects may be true utility tokens, some may be securities, some may be currencies, and some may be a weird mix. These digital assets are fungible and easy to trade, so while a token may act as a security representing direct ownership, a user can most likely still trade that token much like a currency, in a peer-to-peer fashion.
Exchanges should be able to work with projects that are interesting, harmless, and trustworthy, despite them having a vague legal category. If exchanges are too afraid of legal consequences, their fear can stifle innovation by preventing people from investing freely.
As long as due diligence is performed on the users that register to trade on an exchange and the exchange can pass financial audits, then technical risks and categorical decisions should not be an issue. Exchanges should also be able to take on new token standards freely. Token standards may pose a financial risk (and create a new legal category), but the government should let the traders decide for themselves if they’re comfortable taking on the risks that new technologies bring.
Second, the difference between centralized exchanges and decentralized exchanges (DEXs) must be considered. Decentralized exchanges are often open sourced and may have nodes and employees all over the world. DEXs have the potential to offer services superior to centralized exchanges such as lower fees, tighter security, more privacy, and improved performance. If regulators decide to ban the use of DEXs and scare their own citizens, progress could be held back in a big way.
Unfortunately, a major headache with regulating decentralized exchange is that since they promote user privacy, regulators will need to find a smart balance for how to go about auditing these organizations.
All in all, crypto regulations can protect traders and keep their best interests in mind. Still, we need to walk a fine line with making sure that lawmakers do not rush regulations that can stifle innovation.
Regulations will affect centralized and decentralized exchanges alike, but decentralized exchanges present more difficulties. Each exchange has its own upsides and downsides. To offer a clearer picture of what type of options traders have for exchanges out there, we’ll briefly list some of our preferred exchanges and cover their biggest Pros and Cons.
Best cryptocurrency exchanges
- Coinbase Pro is the public exchange for Coinbase, which is one of the largest crypto companies. Coinbase is regulated, compliant with US securities laws, and has a serious reputation to protect, as well.
- Coinbase Pro is FDIC insured, which means that if a bad event occurs and is their fault, their users are protected for up to $250,000. This covers only USD funds, but still, this protection is superior to many other exchange offerings, which is $0.
- Coinbase Pro has relatively good volume, so liquidity should not be an issue for most traders. Volume is one of the largest factors that should be considered when deciding to use an exchange. (Reputation is the most important factor.)
- While Coinbase Pro only offers trading for a select few altcoins, each coin they do offer has been vetted by the community and is generally well respected. This also means that users should not expect coins to be taken off the exchange as a result of low volume.
- Coinbase Pro offers fiat to crypto trading pairs, which many exchanges do not offer.
- Coinbase Pro offers margin trading with up to 3x leverage.
- The main downside of Coinbase Pro is that the exchange does not offer support for many coins or tokens. However, it’s stated that the exchange plans to add more coins and tokens in the future, especially Ethereum-based tokens.
- There are exchanges with more volume than Coinbase Pro. While Coinbase Pro’s volume is probably acceptable for most users, there are exchanges with higher volume, which means that they can offer better liquidity.
- Bittrex is a regulated and compliant US-based exchange.
- Bittrex has a USD market.
- Unlike Coinbase Pro, Bittrex offers support for hundreds of altcoins.
- The ETH market on Bittrex is quite large, with many tokens to trade against.
- Bittrex’s liquidity is very high.
- The exchange is secure. In the past, the team behind Bittrex has even decided to shut down user registration. They know their technical limits and have made a clear effort to scale properly.
- Bittrex may support projects that are too immature. These projects may be at an increased risk to be delisted or pump and dumped. Of course, delisted projects and pump and dumps hurt users.
- Since Bittrex offers more coins and tokens, they expose themselves to more legal risk as the government is still categorizing certain tokens as securities or not securities.
- IDEX is an Ethereum-based decentralized exchange. IDEX’s decentralization provides users with more privacy, anonymity, and (many believe), security.
- IDEX supports over 200 ERC-20 tokens
- The exchange’s interface is user-friendly, unlike other DEXs’ which can be extremely difficult to use.
- IDEX offers good liquidity.
- The fees on IDEX are extremely low (.1%/.2% maker/taker).
- IDEX is known for good customer support; the team is easily reachable.
- Since IDEX is decentralized, its users will not receive the same legal assistance they would from a centralized exchange.
- Although its liquidity is good, IDEX offers less liquidity than centralized alternatives.
- Despite its user-friendly interface, IDEX is not particularly beginner-friendly when it comes to actually accessing the exchange.
- Waves DEX has ~70 trading pairs available
- The exchange is created by the Waves team. Waves is an older, well-respected project in the crypto space that continues to gain a loyal following. They have a reputation to protect.
- Waves DEX features a slick UI.
- The exchange has decent volume.
- Much like how many Ethereum-based exchanges require ETH to trade, Waves DEX requires WAVES. Fees are paid using WAVES. This may be a nuisance for some.
- Waves DEX has less liquidity than centralized alternatives.
- In case of major issues, users will struggle to get legal help. Centralized alternatives offer better protection.