The competition between cryptocurrency exchanges is very fierce. For a long time, a business strategy in this “wild world” seems to have never worked, that is, embrace regulation. But now, the situation seems to be different.
A few years ago, when Binance took the top spot in the global cryptocurrency exchanges, Gemini, a digital currency exchange founded by the twin brothers Cameron Winklevoss and Tyler Winklevoss, also posted posters on the New York subway. They only had one marketing effort. Purpose-Tell everyone that Gemini is a regulated platform that can buy, sell and store cryptocurrency.
However, the so-called Feng Shui turns around. Now it seems that compliance with regulatory compliance is actually a better “shortcut.”
Although Binance Holdings Ltd. no longer provides services to US customers, it is said that they are currently facing investigations by US regulators. Not only that, the British financial regulator also told Binance that a subsidiary of Binance has no right to conduct regulated trading activities in the country in late June. With the increasing pressure on Binance, some digital currency exchanges that promised to comply with US regulatory requirements suddenly discovered that their competitive pressure in some of the world’s largest economies has become less!
Cameron Winklevoss, co-founder of Gemini Exchange, explained:
“Gemini is fighting a protracted battle. We are trying to become the turtle that walks slowly but persists to the finish line in the game. We know that over time, whoever persists for the longest time will be rewarded.”
The above figure shows the trading volume of selected digital currency exchanges over 24 hours (data source: coinmarketcap.com, data extraction time July 9).
In fact, after warnings and lawsuits from the US regulators, the US regulators have helped us to screen out a number of compliant digital currency exchange platforms, such as Coinbase, Kraken, Gemini, Bittrex, and of course Binance.US (the The exchange and Binance Global are separate, only the name and some technology licenses have been obtained from Binance).
1. Coinbase Global Inc. was successfully listed on Nasdaq this year, which means that all their financial data has been audited and compliance operations have been further strengthened.
2. Kraken has obtained a regulated banking license in Wyoming, USA, and is reportedly also actively preparing for listing.
3. Gemini’s parent company, Gemini Trust Co., created the Virtual Commodity Association (Virtual Commodity Association), which aims to eradicate bad behavior in the digital currency market and prevent fraud and manipulation-which is reminiscent of the self-regulatory organization set up by Wall Street. As the slogan on their poster said: “Crypto needs rules.”
The concept of digital currency exchange compliance is rapidly changing
Frankly speaking, the concept of compliance of digital currency exchanges is changing. They now feel that if exchanges can be recognized by US regulators, they can operate almost anywhere in the world, and it will be easier to attract hedge funds and family offices. And the support of institutional investors such as pension funds. However, as digital currency trading platforms have adopted compliance measures step by step, they have begun to imitate the more stable traditional financial industry, including internal control mechanisms, industry organization teams, and related regulatory constraints.
John Griffin, a finance professor at the McCombs School of Business at the University of Texas at Austin, explained: “The original intention of establishing a digital currency system was to allow digital currency exchanges to play the role of traditional exchanges in traditional financial markets. At the same time, they can avoid traditional banking monopolies and build an autonomous role that is not subject to supervision, but now they are beginning to rely on banks and supervision, falling into the’Catch 22′.”
(Note: “Catch 22” is a novel by the American writer Joseph Heller, which reveals the American society’s abandonment of traditional morality and has become an American-style “black humor” theme. According to “No. According to the theory of “Catch 22”, only a madman can be exempted from flying, but he must apply for it. But once you apply, it happens to prove that you are a normal person and you are in trouble. The Catch 22 also stipulates , The pilot can return home after flying 25 sorties. But the regulations also emphasize that you must absolutely obey the order, or you can’t return home. Therefore, the superior can continue to increase the number of flights for the pilot, and you must not defy. This repeats and never stops.)
Although digital currency exchanges have not been around for a long time, they have experienced several booms and depressions. Traders “entrust” their assets to these exchanges, but do they have the ability to ensure the safety of their assets? Let’s take a look at a few of the most typical examples:
1. “Mentougou” Mt.Gox, this Japanese-based platform declared bankruptcy in 2014 after losing the digital currencies of thousands of customers.
2. Quadriga CX suddenly closed down in 2019, and many customers’ digital currencies could not be withdrawn, valued at hundreds of millions of dollars.
3. BitMEX, which was incorporated in Seychelles, was once the largest crypto derivatives exchange. The three founders of the exchange were accused by U.S. prosecutors of ignoring banking laws in 2020 and required the platform to provide services to U.S. customers Not to be used for illegal purposes, but none of the three pleaded guilty.
Binance Holdings has gone from obscurity to become the industry’s largest digital currency in just a few short years, and has since been ranked among the top digital currency exchanges in the world. However, when the time came to 2021, with the visit to the White House, an investigation emerged. According to Bloomberg News, it is said that the U.S. Department of Justice, the U.S. Internal Revenue Service and the U.S. Commodity Futures Trading Commission have begun reviewing various businesses of Binance. Although the specific details of the investigation are not yet clear, it is said that at least it includes whether money laundering is allowed (Binance has not been Allegations of any wrongdoing).
In a statement provided by a spokesperson for Binance, they wrote:
“With the continuous development of Binance.com, we remain committed to cooperating with regulatory agencies around the world. We attach great importance to our legal obligations and continue to invest in our compliance program. This includes establishing a sound money laundering system and pre-employment Government officials advise Binance on regulatory and compliance matters.”
There is no doubt that Binance is still the world’s leading digital currency exchange. According to CoinMarketCap.com, a subsidiary of Binance, the daily spot trading volume of the exchange is more than 100 times that of Gemini, and it is also considered to be the main source of encrypted trading data. But it should be noted that in the field of digital currency trading, even if the scale of the exchange is small, the daily transaction value will reach billions of dollars. According to Bloomberg Billionaires Index estimates–
1. The current market value of Gemini Exchange is approximately US$4.1 billion.
2. The market value of the Coinbase exchange exceeds US$50 billion. The two co-founders of the exchange, Brian Armstrong and Fred Ehrsam, have also become billionaires after being listed. .
3. According to the second private sale data, Kraken’s current value is approximately US$20 billion, of which the value of the company’s shares held by Mike Novogratz, CEO and founder of Galaxy Digital Holdings Ltd. has reached 3.6 billion US dollars.
At the same time, the digital currency exchange industry is also changing rapidly. Because new digital currencies appear every day, one of the biggest problems facing exchanges today is how to decide which digital currencies users are allowed to trade. Kraken Chief Operating Officer Dave Ripley said that he sometimes needs technical upgrades and time to review whether the digital currency violates the law before deciding whether to list it. However, when some popular digital currencies appear, the slightly cumbersome compliance process may lead to the loss of users. After all, many digital currency users like to take risks. For example, Coinbase did not list Dogecoin (DOGE) until June 2021. At this time, 8 years have passed since the creation of Dogecoin. The only difference is that the market value of Dogecoin has soared to more than 90 billion in 2021. The US dollar has attracted the attention of many traders, but after Coinbase listed Dogecoin, the price plummeted.
In fact, it is not difficult for digital currency exchanges to gain the favor of regulators. Some points worth paying attention to include:
1. Do not provide financial products subject to strict supervision, such as digital currency-based derivative contracts;
2. Exchanges must be careful to scale certain “specific types” of digital currencies-if regulators believe that your digital currency is a securities investment product that circumvents the Securities Law, things will become particularly dangerous. One of the most frequently asked questions by the US Securities and Exchange Commission (SEC) is: “Is this an unregistered security?”
Jason Urban, co-head of global trading at Galaxy Digital, explained that once the US Securities and Exchange Commission determines that a certain digital currency is a securities product, it may eventually ban US investors from entering. But the problem is that the current US regulatory agency does not clearly stipulate how to determine that digital currency is attributable to securities.
The competitive landscape of digital currency exchanges is rapidly changing
The other problem is the listing. Landing on the stock market will put more pressure on digital currency exchanges, so once listed, you must always be vigilant, otherwise you will suffer legal disputes because of “failure to protect the rights and interests of shareholders.” In April 2021, Coinbase “poached” Melissa Strait from Stripe Inc. as its chief compliance officer a few months before listing, and then hired Goldman Sachs Group Faryar Shirzad as chief policy officer in May-all of these personnel actions are In order to ensure that business operations are legal and compliant.
Regulatory compliance has opened up a “safe path” for institutional investors to use trading platforms and related custody services, so that their digital assets can be safely kept. However, for cost-conscious Wall Street investors, this model does not seem to be conducive to the development of digital currency exchanges. More and more analysts predict that as they gradually become the mainstream of the market, digital currency exchanges will not be able to maintain for a long time. High transaction fees-Although this is beneficial to digital currency traders, it may put pressure on listed exchanges such as Coinbase, because most of the revenue of these digital currency exchanges comes from transaction fees. Coinbase Chief Financial Officer Alesia Haas (Alesia Haas) said that they will not compete with other digital currency exchanges in terms of fees. He believes that digital currency trading is still not as commoditized as stock securities. At the Barclays Bank meeting in May this year, Alesia Haas said frankly:
“Coinbase hopes to become the most trusted and easy-to-use digital currency exchange for users. In the future, it will also introduce more digital assets and provide more trading methods for users. They chose Coinbase to gain this digital currency exchange experience. Not because of expenses.”
Undoubtedly, as an important part of the digital currency ecosystem, the competitive landscape of exchanges is undergoing rapid changes. As the concept of compliance is injected, the future development direction of the digital currency industry will also change. Who can win in this “battlefield” without gunpowder, let us wait and see!
This article comes from Bloomberg, the original author: Katherine Chiglinsky, Olga Kharif, Matthew Leising
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/bloombergs-in-depth-analysis-why-coinbase-kraken-and-gemini-attach-so-much-importance-to-compliance/
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