Why the current crop of Crypto Exchanges will be investigated and many closed!

And why they will be replaced by the next wave…

The early trading exchanges appeared on the back of the gold rush that was crypto currencies as early as 2013, coinciding with the rise of crypto currencies and ALT coins fuelled by the retail madness of ICOs in late 2016 and all off 2017 seemingly playing with house money until the recent correction…

All seemed ‘fine and dandy’ until the recent murmurings from regulators in the US and concerns raised from other regions, in Singapore, Hong Kong has led to the recent Department of Justice (DoJ) and Commodity Futures Trading Commission (CFTC) investigations into the behaviours of Bitfinex as it relates to Tether (USDT), OKEx based in Hong Kong and others now and old…

Whilst many of these exchanges also trade so called ‘shitcoins’ and offer highly leveraged margin trading, others have created new markets for synthetic crypto products and derivatives where it seems OKEx changed the terms of the contracts involving Bitcoin Cash forcing early settlements. BCH also the result of a hard fork (SV vs ABC) is further unsettling troubled Bear markets, and contributing to deeper than expected volatility centred on realignment of Bitcoin pairs. With many parties with ulterior motives to hurt the original Bitcoin claiming their version reflects the original Satoshi ambitions, but let us not be fooled by Craig’s paranoia. The concerns have been revealed centred on the OKEx position which has prompted a first move action by the Hong Kong Securities and Futures Commission and there will be more to come.

Exploiting Regulatory absence

The most prominent exchanges were set up a few years back when regulators weren’t even on the pitch and now many are retrospectively applying for licenses, in what can only be described as blind panic, while others claim they are decentralised and beyond the reach of any single regulator. They wish, a bold claim that will inevitably draw attention. Several exchanges are claiming “we always intended to be regulated” mode, although they have allowed market participants to have access to trading with little or no form of KYC AML, and where the provenance of the crypto funds were as yet unknown. Its all kicking off as other exchanges have been accused on price fixing and artificially inflating trading volumes. Surely not, really I am so shocked given many exchanges dont reveal the management team or jurisdiction, and seem to operate in the ether, general ether not Vitalik’s version.

Binance is apparently working with Thomson Reuters to add KYC and AML into their workflow without mentioning what they will do with the thousands of current market participants that haven’t done any form of KYC let alone AML; and like so many general crypto exchanges that were born pre 2016 to a world that thought regulation wasn’t watching.

The truth is out there, albeit the internal operations of these exchanges remains opaque at best especially given the news about Tether and Bitfinex apparently having members of the same management team has prompted some to accuse them of activities that create volatility in order to buy BTC as markets fall, which suggests other factors and players are involved that may lead to market manipulation. A concern I increasingly have in the past few months as it appears there are coordinated strategies to move BTC prices. Let us not forget back in June 2018 there were 4 US exchanges under investigation for price manipulation including Coinbase, itBit, Kraken and Bitstamp and in Korea Upbeat was raided with other accused of tax evasion.

Jurisdiction matters for opacity sack…

When you look at where exchanges are registered they tend to be where the regulation is thinest at best or not at all. Whilst I understand first hand it is difficult to set up crypto businesses in the western world when you dig deeper you find BitMEX is registered in the Seychelles and ZB.com is registered in Samoa in 2016 the well known crypto hub. Come on here Samoa? Pacific islands known for incredibly large talented men that play rugby and friendly culture. Bit-Z appears virtual with no apparent jurisdiction like many that claims to be decentralised their domicile is difficult to work out. Who actually owns them and ewhere are they based? Then you have Gemini and GDAX both operate with licenses out of New York it appears operating as a trust company so they can handle client monies and open up accounts to move client monies into and out of fiat more easily.

Traders are looking for a level playing field and a fair game…

Given the huge commitment and large sums of money involved, traders are looking for exchanges that are run properly and offer longevity, value and above all deliver confidence the game is fair. The good news is new exchange infrastructure (both crypto and for security tokens) is emerging from stealth mode whos beginnings start with the licensing process, scrutiny and vetting by the jurisdiction regulators in Gibraltar, Switzerland and Malta to name a few.

New exchanges like our very own Crix.io (built since 2014) a crypto exchange that has permission to operate under the VFAA (Virtual Asset Licence) in Malta ‘soft launched’ in October, has to comply with regulation that mirrors exiting financial services and securities laws. It has to comply and undergo the rigour of Fintech and with regulation comes capital markets scrutiny and demonstrate above all the KYC and AML policies in the case of Malta go further than the EU directives.

Traders requires three things (i) a fair game with no hidden rules (ii) public facing governance and audit, and (iii) an active market delivering liquidity and choice of digital assets (products) to trade. The current batch of crypto exchanges do not deliver on these basic principles and this is why they will be overtaken, or shut down by regulators or indeed abandned by the traders themselves.

But why is the old centralised regulator the traders best friend…?

I have written several times before that new crypto regulation is required to create a safer and more professional trading environment. Many argue this needs to consider the decentralised nature of crypto exchanges if you believe decentralised exchanges can actually work. I do not.

Exchanges scale very quickly and there is a large amount of traders capital deployed representing risk on both sides and obligations from the exchange to underwrite the trading activities and protect the interests of the market, ensuring bad actors are prevented, that market manipulation is identified and there is sufficient liquidity to fulfil orders with adequate treasury management.

Exchanges require fast order matching, immediate settlement and payments into and out of crypto and fiat, a security wrapper that protects the market participants and the safe haven of custody of all assets. But most of all traders such as Qiao Changhe who runs Cayman Islands-registered Consensus Technologies want to know their positions and trades will be honoured, especially futures contracts.

There is more to come…

Derivatives and all forms of synthetic crypto products require closer scrutiny and tighter regulations to create certainty, to market participants, and such is the contractual relationship of these instruments in software code. Quedex is a cryptocurrency derivative’s exchange awaiting license approvals in Gibraltar with USD supporting the underlying trading activities, but the hold up has been credible custody solutions that offer insurance options. Complexity and risk requires careful thought.

Then we have SixGroup backed by the Swiss Stock Exchange with their ETF lookalike offering ETP (Exchange Traded Products) a collateralised non-interest paying bearer debt security (is that all), issued as a security to be traded and their HODL5 Index a package of cryptos the offer guaranteed liquidity to allows investors and traders to buy the market. New financial products are arriving that have formal wrappers that provide a cloak of normality for institutional capital to flow, soon followed by private wealth as their reliance on fiat’s diminishing returns shifts to asset backed securities.

The entry level for new exchanges is far steeper and the demands of the delivering confidence, trust and demonstrating best practise falls at the feet of new crypto capital markets infrastructure founders to do the right things. For these market places to have a future and ultimately replace what we have today, we need to shape up.

As institutional capital starts to trust the legitimacy of crypto markets and with it private capital on the side lines there are trillions of dollars at stake and it is up to us to get it right.

“Ignorance is strengthened”



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Nick Ayton

Nick Ayton

Nick Ayton is a Deep Tech Advisor & Investors, General Partners Multi Family Office, Futurist, Film Maker