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WFE's regulatory affairs head on the risks of unregulated crypto-trading platforms

WFE's regulatory affairs head on the risks of unregulated crypto-trading platforms

“Using the term exchange can be misleading if you’re not doing these things,” said Richard Metcalfe, head of regulatory affairs at the World Federation of Exchanges (WFE) when speaking to Finextra after laying out their six recommendations for regulators and crypto trading platforms.

The WFE released these recommendations earlier this week, which are:

  1. Segregate market infrastructure functions within a CTP where appropriate such as limiting CTPs trading their own book or in potential conflict with their customers;
  2. Operate orderly markets by having in place systems and controls for broader risks, such as abusive trading, to protect integrity of price formation;
  3. Hold sufficient financial resources to meet expected operational stress events;
  4. Facilitate compliance with best execution requirements;
  5. Increase robustness of listing standards;
  6. Have appropriate governance and management requirements.

Metcalfe told Finextra that they have been watching the cryptocurrency market and that “it became apparent to us early on that whilst crypto raised some interesting challenges, the thing that we just kept coming back to was suspicion.”

He elaborated: “A lot of participants in crypto might wrongly assume that all the checks and balances that exist when you would go and trade shares on a properly regulated market, or indeed pretty much any other established financial asset, would be in place. They might take for granted the sort of things that you would get in that predefined environment but they wouldn't necessarily be in place.”

The WFE published cryptocurrency research earlier this month which found that the risks that unregulated crypto-trading platforms bring are compounded by the fact that they frequently carry out further activities that would not be permitted, or would be closely regulated, in mainstream public markets. The second half of this research has not yet been published.

Metcalfe also pointed out that “a lot of individual financial centres were perhaps trying to work out how to position themselves and how restrictive to be because there was a potential upside in terms of developing an interesting new strand of markets, developing trading, developing activity, and the related technological development.”

He stated: “There was a temptation for individual financial centres to let this run and see how it develops with some obvious risks that would go with that. The pendulum seems to be, we think rightly, swinging back.”

Metcalfe argued that their recommendations are those that from a public policy perspective should be kept in mind for investor protection and market integrity.

However, Metcalfe emphasised that “none of this is in the spirit of being opposed to crypto, quite the contrary, as seen with the previous paper, our members are looking at it and thinking this is the direction a large part of the world seems to be headed and there’s very interesting work to be done.”

The WFE’s hope is that their recommendations will be taken into consideration by regulators across the globe, and Metcalfe further added that they will be responding to the International Organization of Securities Commissions (IOSCO) DeFi and digital assets consultations.

Comments: (1)

Peter Davey
Peter Davey - peter davey and associates limited - London 02 October, 2023, 13:11Be the first to give this comment the thumbs up 0 likes

And FMI compliance generally, notably no 1 Legal basis, "An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions."