Regulating chaos in crypto world: How a licensed exchange transforms the cryptocurrency ecosystem

Viktor Kochetov, CEO of digital wallet and professional cryptocurrency trading platform Kyrrex, reflects on the regulation of crypto exchanges as the major stumbling block of this domain, and discusses how the lack thereof impacts the cryptocurrency landscape.

Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.” — Warren Buffett

From the days of Wall Street’s inception, millions of people have been involved in currency trading, juggling fear and greed. Some use calculators, some delve into analysis, others count on their sixth sense — patterns do matter; however, they do not necessarily work 100 per cent of the time.

One way or another, it takes risk acceptance and having the guts to join the buy-and-sell game. The digital age arrived and changed nearly every aspect of our lives — we communicate, read books, and make reservations differently from our parents. Humanity has entered yet another dimension where many issues are addressed in only several clicks.

Digital evolution synthesised cryptocurrency — an entirely new financial world of digital assets. So many opportunities, so many risks — but has crypto earned credibility with the masses? Far from it. Do people really trust crypto and think about investing? Unfortunately, this is not the case — except for cynical Millennials, who, according to Breakermag’s research, seem to trust nothing but crypto.

The question of the crypto market’s credibility is pretty much about perception and knowledge: One part of the audience knows nothing; the other one knows too much and uses blind spots for illegal activities.

The regulatory aspect presents a full-fledged blind spot — it is uneven and fragmented. In reality, the dominant majority of crypto exchanges were founded by crypto enthusiasts; thus, a big chunk of the market is actually in the hands of buffs. This creates the scope for action for those ready to compromise morality, emboldening them in terms of neglecting guarantees, disclosure, accountability and ultimately, ethical business.

Regulation on the global scale

As per Cointelegraph‘s report, only a tiny percentage of prominent crypto exchanges are regulated and operate with a license. 216 exchanges were analysed with a view to crucial aspects such as customer due diligence, compliance with the “Know Your Customer” framework, authorisation, negative press coverage and other risk categories.

Reality bites, however, as . only a handful of crypto exchange market players have their feet firmly on the ground and can provide confidence, peace of mind, and relative stability to their clients. The legal status of cryptocurrency varies from country to country; the same is with exchanges. The exponential growth of cryptocurrency’s ubiquity has put pressure on regional and national authorities to decide upon relationships between crypto and jurisdiction.

Putting aside the terminological discrepancy, territory-wise virtual assets, digital currency, electronic currency, crypto-token etc. jurisdictions seem to have one thing in common: Variations of warnings considering investing pitfalls.

Apparently, the market is quite volatile, and investors do so at their own risk — having no legal recourse in place means they will have no one to turn to in cases involving illegal activities. Some countries impose restrictions, while other facilitate transactions. Some do not recognise crypto as legal tender, but at the same time tweak their regulatory framework to boost investments into the domain.
The vast number of crypto-asset platforms are just platforms — no legal status, no corporate structure, no information on board. These
platforms present a threat for financial stability, which is why the . Financial Stability Board (FSB) keeps an eye on these platforms and considers coordination on a global scale among its top priorities.

Uncertainty: its nature and outcome

Unsurprisingly, the world of crypto is deemed as a turbulent financial Wild West, with crypto exchanges being categorised into the good, the bad and the ugly. The environment is erratic, the value of cryptocurrency fluctuates, and fraud vectors are getting increasingly sophisticated. Decentralisation is a window of opportunity towards a transparent environment with responsible stakeholders. Ironically, decentralisation means each State looks at crypto from its own perspective. The same can be said for its posture and security.

The main regulatory challenges involve difficulties in currency classification and over-regulation. Obviously, the cryptocurrency space needs to be rid of scams; however, providing excessive regulation, in the form of regulation enforcement and restrictions, can hinder innovation. The problem is, governments and technologies exist in different dimensions where developments are taking place at a different pace, partly because these two are looking in different directions.

The urge for order

It is common knowledge that today’s business is ecosystem-based and platform-driven. Customers provide their sensitive data in order to receive superb personalised user experience and the ability to fulfill whatever goal they have as quickly and seamlessly as possible.

In view of this, trust is the paramount and most valuable asset for businesses. Each and every person engaged in cryptocurrency trade demands the sense of safety and that every transaction is secured. In Feb, 22 Financial Action Task Force (FATF) issued a set of requirements urging 35 countries to regulate their crypto exchanges as commercial banks. The requirements involve regulations on monitoring, licensing and registration.

Regulated crypto exchanges raise a high bar for markets and governments, emphasising the proper — secure and ethical — use of technology as the only prerequisite for ecosystem health. Regulation is, in fact, much more than a set of stringent rules — it is the perfect material for building the bridge between crypto and fiat, innovations and traditional finance. Putting security at the core — so that it is multi-layered and penetrates every area of the exchange, making it transparent — means building welcoming environment for investments.

Government authorities could provide cryptocurrency entities with guidance and policies to establish and maintain entity transparency, custody and settlement, trading, cyber security and systems integrity.

Also, regulatory regimes for virtual currency was significantly improved by defining certain key terms which entities should incorporate into their policies to ensure compliance with anti-money laundering legislation.

For customers dealing with a licensed entity, this means more paperwork which allows for transparency, fair trading, security and systems integrity. Taking into account the paramount importance of having a credible crypto environment, the crypto exchange has to be conducted and facilitated by a licensed partner that builds its business around ethics and morality via regulation.