How to regulate cryptocurrency exchanges efficiently in a secured way?
When Bitcoin was released to the world in 2009, it was a part of a noble cause. Bitcoin offered people a secure way to perform digital, financial transactions on the web in the form of cryptocurrency. It decentralized money and made it possible for people to store their money outside of a centralized authority, aka a bank. It also allowed users to sidestep banks and perform financial transactions directly with one another with crypto.
After the Financial Crisis of 2008, Bitcoin presented a new money system that would not have the same shortcomings as regular currencies. This gave many people hope, and users of the currency began to pop up around the world.
Cryptocurrency has seen tremendous growth over the last 9 years. Fast forward to today and Bitcoin no longer remains the only one on the market. As of May 2018, over 1800 types exist on the blockchain. Over 500 exchanges exist as well, and that number continues to increase with each passing week.
Nevertheless, while momentum for cryptocurrency has risen over time, it has not seen worldwide adoption. People have shown that while cryptocurrency is inherently a great idea, they do not automatically trust it.
It goes back to the old saying, “respect is earned, not given.” People want to know that their cryptocurrency investments will be secure and keep their personally identifiable information (PII) safe under this new currency system. This will build trust for the technology among users and respect from regulating entities. Without these two objectives met, the worldwide adoption of a cryptocurrency system will continue to be scrutinized.
Cryptocurrency exchanges indeed have things to offer our current system of transactions and we can even see this sector becoming an integral part of global economies, but there is a lot of work that needs to be done. They are scrutinized every day, but even running legitimate exchanges does not automatically guarantee that consumers will adopt their system. Exchanges must understand the issues they face with consumers and regulators and use this knowledge to their advantage.
With this understanding, they will be able to build into their exchanges the trust and respect consumers desperately want. This will create lasting financial relationships with consumers.
Cryptocurrency Shortcomings for Users
One of the big problems with this market is that people do not understand how this investment strategy will keep their money safe. There are several problems that have the potential to severely limit the adoption of cryptocurrency over time, including:
- Huge amounts of currency that are at stake
- High gains and even higher price crashes
- Equally treacherous cryptocurrency exchanges where crypto is bought, sold and stored
- Exchanges are magnets for cyber fraud and technological flaws
Many cryptocurrency investors may not be optimally verified, validated and securely onboarded when entering into relationships with crypto exchanges. Cryptocurrency experience “flash crashes” where it suddenly plummet in value. Exchanges are not required to have circuit breakers in place when wild price swings take place. This prevents trading from halting when it should. This outcome can cause stress and panic within the cryptosystem which can lead to huge gains—and huge loses—in currency.
Since 2011, there have been at least three dozen heists of cryptocurrency exchanges. Many times, the hacked exchanges have been forced to shut down their services. This means investors in these exchanges have often been left empty-handed and wondering whether they will receive any compensation for their loss. Such events cause a lack of trust and a push for more regulation in the cryptocurrency space.
Banks Do Not Trust Crypto Exchanges
Because the space is so volatile, many banks are wary of doing business with cryptocurrency exchanges. Banks find them skeptical. JPMorgan even called Bitcoin “a fraud” and predicted it would “blow up” in 2017.
In March 2017, Wells Fargo refused to process wire transfers for Bitfinex, a cryptocurrency exchange. This left Bitfinex customers unable to transfer US dollar out of their accounts, leaving many of them disgruntled. A Bitfinex representative stated at the time that dealing with banks “is a constant and ongoing challenge. Citizens and businesses are treated like criminals when they are not.”
Banks are concerned that cryptocurrency exchanges do not perform thorough know your customer (KYC) and anti-money laundering (AML) checks to verify their customers prior to onboarding them. They fear that there are criminal activities and sanctions violations taking place in their exchanges. Because of this, they limit their interaction with exchanges since they do not want to be liable for any illegal activity occurring within cryptocurrency exchanges they do business with.
A Call for Regulation
Governments have been watching cryptocurrency closely since its creation. With its growth and continued use over time, they know there is value in the existence of the cryptosystem. What governments have struggled with is how to regulate this space and do so in a way that offers the same protections to users as government-backed currencies—fiat money.
Nevertheless, regulation in the cryptocurrency space is on the rise. As demonstrated by the European Union earlier this year, rules have been put in place stating that cryptocurrency exchanges will be required to verify all users from traders to suppliers of cryptocurrency wallets. This means anyone who provides blockchain services should register. It is likely that other countries will follow suit and cryptocurrency regulation will continue to increase since many governments believe that cryptocurrency exchanges have a duty to know who their customers are and ensure they are not using the technology to fund criminal activities.
What Can Exchanges Do Now
Cryptocurrency exchanges need to begin self-regulating to keep up with upcoming regulation. This will allow them the opportunity to become an integral part of the global, financial system.
Cryptocurrency regulation would benefit exchanges and users in a variety of different ways. It would increase the flow of institutional capital into cryptocurrency markets by building trust between the two systems. It would also strengthen corporate governance in cryptocurrency companies. Cryptocurrency exchanges would be legitimate entities and be subject to the same rights and benefits as other legal institutions. In theory, cryptocurrency consumers should feel more secure knowing their interests are protected by regulators.
Plus, cryptocurrency consumers would experience more transaction freedom if regulations were put into place. Currently, many exchanges put limits on the amount of cryptocurrency that can be transferred to fiat money in their unverified accounts. If all cryptocurrency exchanges were regulated, these types of hindrances to consumers would not exist.