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Now, some have returned, others are seeing increased users and one has recently secured a multi-million dollar investment. But the judgment has also rekindled the question of regulating crypto exchanges. There exists no clear legal and regulatory framework governing them. Recent reports suggest that the government may be mulling over a regulatory framework for cryptocurrencies. The RBI has also recently clarified that banks are not prohibited from providing services to traders and exchanges. Given the above, this article examines the broad contours of the possible approaches that can be taken to regulate crypto exchanges as they perform important functions but also carry significant risks.
Similar to stock exchanges, crypto exchanges provide an online platform or marketplace, albeit for cryptocurrencies. By also enabling trade or exchange of cryptocurrencies for fiat money, they connect the crypto and traditional financial systems. Regulators also look to exchanges for information on users and transactions, although this may depend on their organisational structure and functions. For example, centralised exchanges offer a single point of regulation.
But decentralised exchanges enable trades or exchanges on a peer-to-peer basis through an automatic process involving smart contracts. They make regulation challenging due to the anonymity of users and lack of central presence. Crypto exchanges have also assumed importance due to their role in initial exchange offerings IEO.
Crypto exchanges have therefore emerged as a key market infrastructure within the crypto-ecosystem. But there are several concerns due to which regulation and supervision is required.
In its heyday, MT Gox crypto exchange accounted for nearly 70 per cent of all Bitcoin transactions. Its hacking led to losses estimated in billions of dollars today. It went bankrupt. If, however, the competitive forces exercised by competitors other exchanges , complements cryptoassets or customers investors are weak, market players exchanges are unconstrained to act in ways that harm others. Think about how much more difficult it would be for an exchange to delist Bitcoin with its much higher market capitalization, velocity and liquidity compared to Bitcoin SV.
Evidently, Bitcoin is more valuable to exchanges and therefore the constraints around how exchanges treat it are tighter. In reality, the majority of cryptocurrencies are nowhere near as important as Bitcoin, and the fact that they are not backed by unified institutional actors further diminishes their bargaining power. Large investors could have a similar constraining effect, since exchanges would not want to lose investors who can generate large volumes.
For this to work it would mean that cryptocurrency ownership is concentrated in large investors there is evidence in that direction, for example 42 percent of Bitcoin is owned by the top 0. The factors listed above leave out one important aspect of regulation: the fact that, ultimately, it is a political game, not an academic exercise. We even have a fancy name for it: New Institutionalism.
As a function of the executive branch, regulation is subject to political pressure and revolves around interest groups. Nascent immature markets, such as that of cryptoassets, are usually captured by the interests of the existing regulatory authority and those of the public. They are captured by the existing authority in the US, this is the SEC because they are already in the game and by extending their reach they justify their existence. Widened reach and heightened activity entitles them to more funding and higher rating.
Just look at how everyone speaks of the European Commission as the global antitrust and privacy enforcer after having gone after Google and the like. Nascent markets are also more likely to be regulated in the name of the public interest both because people are generally more vulnerable in new market contexts, and because industry interests have not developed lobbying capacity yet. This leaves the field clear to side with the public which is generally seen as the weaker side.
Should Cryptocurrency Exchanges Self-Regulate?
On the contrary, regulatory interest and grassroots support for crypto assets seem stronger. In the end, it is usually not a question of whether a market segment will be regulated or not; rather a question of how it will be regulated. Coin in vice via Shutterstock. In the mind of a regulator To decide whether Binance, or any exchange for that matter, should be neutral and not discriminate against crypto assets be it cryptocurrencies, crypto derivatives or other , regulators would consider a number of factors.
Unequal bargaining power and anticompetitive conduct The main idea behind non-regulated competitive markets is that actors behave well because market forces discipline them. Politics, politics, politics The factors listed above leave out one important aspect of regulation: the fact that, ultimately, it is a political game, not an academic exercise.
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View of Blockchains and Bitcoin: Regulatory responses to cryptocurrencies | First Monday
MAS cannot issue prohibition orders to persons regulated under other Acts. Therefore, the new proposed legislation will allow MAS to issue prohibitory orders against crypto businesses in case of misconduct. Banks ceased doing businesses with cryptocurrencies operators and arbitrarily closed their bank accounts. For instance, Luno, a cryptocurrency exchange which halted its activities in owing to closure of its bank accounts, resumed operations in Singapore towards the end of after its bank accounts were opened.
Banking continues to remain a challenge and different banks have different approaches.
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Businesses are subjected to extensive diligence before they are offered bank accounts, and many banks will outright decline such privilege to companies that have any touch points with cryptocurrency. The enhanced regulatory powers with MAS may be a cause for concern for crypto businesses and especially start-ups looking for a more flexible penalty regime.
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This implies that virtual asset service providers will have to ensure that their overseas operations meet the same regulatory standards as their Singapore operations. MAS has been supportive of crypto start-ups and firms experimenting with cryptocurrency and blockchain technologies. This friendly climate has been a magnet for several big crypto businesses from countries like Australia, Japan and China setting shop in Singapore. Major crypto businesses such as Japanese-based Liquid Group Inc. Consumers will also be more comfortable in trusting licensed crypto operators.
The Code also promotes best practices, including Know-Your-Customer, to help crypto businesses comply with the new regulatory framework. Section 5 and 6, Payment Services Act, supra note Section 6, Payment Services Act, supra note As defined under Section 2 1 SFA, this includes: a debentures or stocks issued or proposed to be issued by a government; b debentures, stocks or shares issued or proposed to be issued by a corporation or body unincorporated; c any right, option or derivative in respect of any such debentures, stocks or shares; d any right under a contract for differences or under any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in - i the value or price of any such debentures, stocks or shares; ii the value or price of any group of any such debentures, stocks or shares; or iii an index of any such debentures, stocks or shares; e any unit in a collective investment scheme; f any unit in a business trust; g any derivative of a unit in a business trust; or h such other product or class of products as the Authority may prescribe.
Sections and , Securities and Futures Act, supra note Section 6, Securities and Futures Act, supra note Section 82, Securities and Futures Act, supra note Section 99, Securities and Futures Act, supra note The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. All Rights Reserved.
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