With the rise of cryptocurrencies and ALT coins, fuelled by the retail madness of Initial Coin Offerings (ICO’s) in late 2016 and all of 2017, we have seen an increase in the number of trading exchanges that have come to fruition. Everything seemed to be fine and the crypto industry was making more millionaires overnight than any other form of investment. However, regulators in United States, Singapore and Hong Kong have decided to now conduct investigations into the behaviours of such exchanges, to ensure that ICO’s comply with the appropriate rules and regulations of AML (Anti-Money Laundering) and CTF (Counter-Terrorism Financing).

The most prominent exchanges were set up a few years ago when regulators did not exist. Now many ICO’s are retrospectively applying for licenses, in what can only be described as a blind panic, while others claim that they are decentralised and beyond the reach of any single regulator. This claim inevitably draws more attention to them. A few exchanges have claimed that they “always intended to be regulated”, although they have allowed individuals/companies to trade with little to no form of KYC AML procedures taking place.

Binance, one of the world’s biggest crypto-exchanges is currently working with Thomson Reuters to add KYC and AML into their workflow, although this is a step in the right direction, no indications have been mentioned as to what they will do with the thousands of current market participants that haven’t done any form of KYC, let alone AML. The truth is out there, albeit the internal operations of these exchanges remain opaque at best especially given the news that back in June of 2018, there were four US exchanges under investigation for price manipulation, including Coinbase, itBit, Kraken and Bitstamp.



Why jurisdiction matters?

When you look at exactly where a lot of these exchanges are registered, they tend to be where the regulation is at its thinnest or not best at all. It is often difficult to set up crypto businesses in the western world, when you dig deeper you find exchanges like BitMEX registered in Seychelles and the well-known crypto-hub ZB.com registered in Samoa in 2016. Like many exchanges that claim to be decentralised their domicile is difficult to work out as well as who actually owns them and where are they based?

Traders want a level playing field and a fair game

Due to the huge commitments and large sums of money involved, traders are looking for exchanges that are governed properly and offer longevity. New exchange infrastructure is emerging from beginnings that have started with the licensing process, scrutiny and vetting by the jurisdiction regulators in Gibraltar, Switzerland and Malta to name a few.
When looking for a crypto exchange, traders look for four things:
• A fair game with no hidden rules
• Public facing governance and audit
• An active market delivering liquidity
• Choice of digital assets to trade
The current crypto exchanges that exist do not deliver on these basic principles, which is why they will be overtaken and/or shut down by regulators or indeed abandoned by the traders themselves.

Why is old centralised regulator the trader’s best friend

New crypto regulation is required to create a safer and more professional trading environment. As exchanges scale very quickly and there is a large amount of trader’s capital being deployed this represents risk on both sides, from the exchange to underwrite the trading activities and protect the interests of the market, ensuring bad actors are prevented, that market manipulation is identified and that there is sufficient liquidity to fulfil orders with adequate management. Exchanges require fast order matching and immediate settlements and payments into and out of crypto and fiat, a security wrapper that protects the market participants and the safe haven of custody of all assets.

The entry level for new exchanges is far steeper than ever before, and the demands of delivering confidence, trust and demonstrating best practices falls at the feet of new crypto capital markets infrastructure founders to do the right things. For these marketplaces to have a future and ultimately replace what we have today, we need to shape up. As institutional capital starts to trust the legitimacy of crypto markets and with its private capital on the sideline there are trillions of dollars at stake and it is up to us to get it right and ensure that these markets are AML and CTF compliant.