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Crypto trading needs exchange-level regulation
Global body sets out six principles to promote sound marketplaces, build trust, stability
The Asset 28 Sep 2023

Crypto-trading platform (CTPs) should disclose their regulatory status and not describe themselves as exchanges until they are appropriately regulated and adhering to the standards that all regulated non-crypto market infrastructure providers do, according to a recent report.

And while decentralized finance might bring innovation to financial products, CTPs are frequently not as decentralized as they first appear, which presents some risks, finds the Promoting Sound Marketplaces: DeFi/CeFi, Crypto Platforms and Exchanges report, published by the World Federation of Exchanges (WFE) – the global industry association for exchanges and clearing houses.

In light of these issues that continue to affect the nascent crypto-currency industry, which has suffered several high-profile controversies and collapses, the WFE recommends that CTPs follow six key principles that will promote sound marketplaces in crypto-trading:

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

The report, which draws on the collective experience of regulated market infrastructures as trusted guardians of public markets, also recommends that governments and regulators require CTPs to meet the high standards that all market participants expect and deserve.

By applying regulatory principles that have been proven via established trusted market infrastructures, governments and regulators can aid the crypto-trading sector to grow while protecting investors and ensuring orderly, fair and transparent markets.

“The exchange industry continues to believe in the promise of crypto trading and digital assets and is working with all stakeholders to evolve market structure and standards to the level necessary to facilitate growth and trust in these markets,” says Nandini Sukumar, the WFE’s CEO. “These six key principles should be a checklist for any CTPs that are serious about meeting the standards expected of a credible operator of markets. Observing the standards will not only safeguard markets, it will enable the sector to grow.”

Richard Metcalfe, the association’s head of regulatory affairs, adds: “Governments and regulators helped to shape the ethos of the current market infrastructure so that it operates in the trusted manner it currently does. The same logic must apply to CTPs, whether centralized or not, to prevent the significant risks and realities we have seen that can, and do, harm investor trust.”

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