Crypto Jun 03, 2020

Understanding Regulations in Cryptocurrency Exchanges

The various attributes of cryptocurrencies have created a number of regulatory…

The various attributes of cryptocurrencies have created a number of regulatory bottlenecks that have prevented governments and economies to control traders.

In a nutshell, the only way that crypto exchanges can be truly regulated is if the sectors work in harmony with information sharing and coordination taking place across the various echelons of regulatory frameworks and law enforcement.

In the Indian context, the Reserve Bank of India (RBI) had tried preventing crypto exchanges and other related actors from utilizing the banking system. The move led to a lot of cases in which crypto exchanges were forced out of business before the Supreme Court challenged the RBI decision.

Today, as much as the Supreme Court decision saw an uptick in activity within the crypto industry with the occurrence of new users, concerns about the proper regulation of crypto exchanges have emerged.

This question’s validity occurs in the face of a rather imbalanced ecosystem that lacks precise legal and regulatory mechanisms to provide guidance to the crypto traders. Pursuit to this matter, the RBI has already maintained the banks’ ability to provide services to crypto exchanges.

At this point, the question remains – what are the various credible measures that can be considered in ensuring that cryptocurrency exchanges are checked and regulated?



Understanding the Importance of Crypto Exchanges

Just like stock exchanges, cryptocurrency exchanges provide a platform where digital assets can be traded. The fact that crypto exchanges enable the trade of digital coins for fiat money means that these marketplaces act as important bridged between the crypto and traditional financial systems.

In addition, the significance of cryptocurrency exchanges is reflected on their purpose on initial exchange offerings (IEO). Aside from initial coin offerings (ICO) where tokens are issued to investors directly, crypto exchanges act as intermediaries in vetting issuers – an aspect that reinforces the importance of crypto exchanges as critical market infrastructure in the cryptocurrency industry.

What Are the Concerns?

Currently, there exists a host of concerns that warrant for the regulation of cryptocurrency exchanges.

Mainly, investor protection is needed to eliminate the occurrence fraudulent cases in the industry, including the ability for crypto investors to access their funds efficiently during disputes.

The lack of a clear control system means that most crypto exchanges go unchecked. These platforms are known to co-mingle client funds from time to time – practices that should be controlled to curb conflicts of interests and other consumer protection risks.



What Are Some of the Approaches to Regulation?

First, it would be critical for governments to acknowledge cryptocurrencies as securities or financial instruments before implementing anti-money laundering and terrorism financing legislations. In this breath, the existence of licensed crypto exchanges will provide a clear path for regulation that would be targeted by proper laws.

Then, as soon as a legal framework is laid out, appropriate mechanisms must be used to define the entry points of regulating crypto exchanges. In this sense, the government must determine the actors that would be allowed to operate crypto exchange and intermediary functions within the industry – including the firms and individuals that can trade in crypto after acquiring genuine licenses.

Importantly, licensing operate within the boundaries of clear compliance and eligibility standards that would plug into a thorough scrutiny of applicant crypto exchanges. The trading of digital assets will be restricted to a vetted list of crypto exchanges that would undergo tough Know Your Customers (KYC) checks and verifications.

Thereafter, to succeed, regulatory frameworks must offer an opportunity for continuous supervision of crypto exchanges on matters safety as far as asset and investor security is concerned. Such a monitoring and evaluation process would ensure that crypto exchanges operate with utmost transparency, along with existence of the necessary dispute resolution mechanisms.

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