Crypto Exchanges Rush into the Regulated World


This year, the bitcoin and to some extent the crypto market as a whole, have recovered a bit from the crypto crash of 2018 and subsequent crypto winter. Trade is up and so the lifeblood of crypto exchanges is streaming hotter and faster again. Both regulators and exchanges have learned hard lessons, because of exchanges facilitating crime and most ICOs misleading retail investors. This has spurred further innovation and change.

The race to license

Because of the harsh crypto climate in the US, where the SEC is hunting down ICO after ICO, and states are sending subpoenas to exchange after exchange, crypto exchanges are increasingly looking for legal shelter. Reportedly, some 110 crypto exchanges applied for an exchange license in Japan that has recognized bitcoin as a legal payment method, was home to the most prominent exchange bankruptcy (Mtgox) in the young crypto history, and of course must believe that Satoshi Nakamoto is actually a Japanese undercover agent. Also Estonia, known for its mild and crypto friendly climate, has introduced a regime under which exchanges can easily acquire a crypto exchange license. Just for a few thousand euro. Not a big threshold.

Within the G20, it has been agreed that crypto exchanges will be required to apply KYC (Know Your Customer) checks, similar to banks and Regulated Markets (RMs). The crypto exchanges that get licensed, will likely be the ones that survive. Reversely, exchanges without license will likely be criminalized, go underground, and get persecuted and penalized.

Crypto exchanges that facilitate US retail investors, are limiting trade to tokens that are not seen as security by the SEC or stablecoins that are approved. Such non-security tokens don’t meet the so-called cumulative criteria of the Howey test: is money invested, is it managed, and is profit promised? Some attempt to self-management in the industry has led to a rating of tokens (unlikely 1..5 likely) by the so-called Crypto Rating Council that is applying the Howey-test to indicate whether the token has characteristics of a US security.

Another aspect of highly regulated environments is that wash trading is forbidden, the shady practice of creating matching buy and sell orders with the only purpose of pumping up the volume for certain tokens or the exchange as a whole. The Blockchain Transparency Institute reports (September 2019) that according to its analysis Kraken, Poloniex, Coinbase and Upbit are the cleanest exchanges. Very interesting is the raw criticism on CoinMarketCap (CMC): “CMC still lists numerous scam exchanges in its Top-10 ‘Adjusted Volume’ rankings. Its Top-10 list includes LBank,, Bit-Z, Coinbene, and OEX,” for which “our data shows wash trading rates at high levels from 96.9% up to 99.7%. This continues to be because CMC ranks exchanges by trading without any basic checks, which motivates trading platforms to report false data and rank higher, thus becoming more visible to users. According to our calculations, among the Top-100 exchanges on CMC, there are 73 currently which are wash trading over 90% of their volumes.”

Regulated exchanges go into cryptos

Ordinary exchanges have witnessed that young investors like the adventure of the unexplored and high risk crypto assets. In an attempt to reach out to this new market, some existing exchanges have expanded towards the crypto market. For example, the Stuttgart Boerse, the number 2 regulated market in Germany, has recently announced to expand into the crypto trade. Such a regulated exchange has the advantage of access to capital, connectivity to trading platforms, and good governance. Likely, such existing exchanges limit themselves to the most popular tokens, such as Bitcoin and Ethereum, that are not seen as securities in the US, EU or other Western markets.

Free Listings at DEXs

In a Napster-like attempt, a new generation of exchanges is developed that is peer-to-peer by nature: so called Distributed Exchanges (DEXs). The idea is that if there is no central system that facilities the listing of tokens and trade, no government can take legal action against it. The platform facilitates the trade directly between two individual wallet owners. Another advantage that is sought after is that of the holy grail of absolute security: if an exchange itself is built on a distributed blockchain, it becomes virtually as unhackable as the Bitcoin blockchain itself. Both assertions are untested, and especially the legal one is questionable.

A final advantage of the DEX, like Etherdelta, is that any token can be listed for free and subsequently be traded. In case of Eteherdelta, any eteherum based token like Icecat’s ICURY is automatically listed when the ethereum contract is entered and the number of decimals (18).

It is predictable that the underworld will start to prefer unregulated DEXs over regulated exchanges – DEX or non-DEX – to dodge the required KYC checks of the regulated ones. A potentially good example of that is the DEX that McAfee just launched, with the predictable name of McAfeeDex.

Regulated Markets for Security Tokens

The massive failure of most ICOs, whereby the founders had no intention to create something, but were just looking for an easy way to get rich, has led to a global crackdown by authorities to protect investors. Rightfully so. Some startups thought that an offering via an exchange (IEO – initial exchange offering) would dodge the bullet. But, that’s not true of course. ICO and IEO tokens both have no intrinsic value. So, also buying IEO tokens are highly likely to lead to the same disappointments. Especially, in a contracting market where bitcoin is perceived as a safe-haven, and alt tokens are almost all down against the bitcoin.

The more fundamental answer to the ICO and IEO troubles are stable coins and STOs (security token offerings). In the case of a stable coin, like USDT, the token is (one-to-one) backed up by fiat currencies, in this case the US Dollar. In case of a STO, the token is actually a financial instrument, and linked to a share, bond or other real asset with legal and economic rights attached to it. In most Western jurisdisctions it’s likely that the trade of at least STOs would require an exchange to get a Regulated Market license or at least a Multilateral Trade Facility license.

ICURY listed on a licensed exchange?

What does this all mean for Icecat’s ICURY? The ICURY is just having a toe in the water in the longtail of exchanges. It’s listed by Txbit, which looks for a crypto exchange license in Estonia, and on two DEXs: Etherdelta and Yuper. We don’t expect a lot of firework from DEXs regarding licensing. So, we’ll look into the ambition of txbit, and study what benefits licensing can bring in this cowboy market.

Founder and CEO of Icecat NV. Investor. Ph.D.

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