We asked the question recently, will regulators kill crypto? Our opinion is that compliance with regulations may result in severe damage to current crypto kingpins like Coinbase and Binance. However, a crypto sector that offers the same investor protections as in traditional finance will be welcome news to investors who see long term promise in decentralized finance, crypto exchanges, and sectors like blockchain gaming. A harbinger of things to come is a new regulation-compliant crypto exchange backed by Citadel Securities, Fidelity Digital Assets and Charles Schwab Corp.
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EDX Markets Crypto Exchange
Bloomberg reported that TradFi heavyweights Citadel Securities, Fidelity Digital Assets and Charles Schwab Corp. are among the backers of a new crypto exchange, EDX Markets. The newly opened crypto exchange will trade only Bitcoin, Ethereum, Litecoin and Bitcoin Cash. It will serve only institutional investors. And, most importantly, it will separate trading, clearing house, and custodial functions. Because the list of tokens that EDX will trade does not include any that the SEC has said are securities, that should remove the need for at least one set of regulatory steps.
What Investors Want From the Crypto World
Investors are always looking for profits. Bitcoin, Ethereum, and the rest of the crypto world generated profits as the investment niche grew. Those who worried about putting their money into crypto had concerns about market risk, the wild fluctuations of the crypto market. That could be forgiven when the market kept growing. It became less forgivable when crypto winter set in and losses piled up upon losses. The other set of risks had to do with hacking of crypto exchanges and Defi businesses, issues as basic as forgetting one’s keys and losing access to crypto wallets, and questionable practices of crypto businesses. Serious investors are used to managing market risk. What they are happy with as regulation takes hold is that crypto will need to comply with the same sorts of rules and regulations that banks, stock and commodity exchanges, insurance companies, and everyone else in the traditional business world have always complied with.
Crypto Exchanges That Comply With SEC and CFTC Rules
Regulation-compliant crypto exchanges will become the norm as current exchanges comply with SEC and CFTC rules. There will also be new businesses like EDX. How will this affect the crypto world? Moving custody of customer assets out of the hands of crypto exchanges will help prevent a repeat of the fiasco of the FTX collapse where customer assets appear to have been used illegally. Exchanges will need to sort out the tokens that they trade. Those that are securities according to the SEC will need to be registered as such. Those that are deemed commodities by the CFTC will likewise need to be registered and dealt with in an appropriate fashion. Traders and investors buy and sell on the New York Stock Exchange or Nasdaq without worrying about who is handling clearing house activities or custody of assets. Most folks did not worry about this before in the crypto realm although they should have! Serious investors who are used to having such issues as counterparty risk, asset custody, and separation of trading functions handled automatically will be happier with the new regime. That will bring more assets into the crypto markets.
Reliability of Crypto Trading Tools
As regulation goes forward, crypto exchanges adapt, and new regulation-compliant crypto exchanges are created we expect one salient issue to be dealt with. That issue isBitcoin wash trading. Wash trading is when a trader simultaneously sells and buys an asset in a market. Selling a stock when a person has taken a loss is legal. Taking a tax deduction for that loss is also legal. What is not legal is to then immediately buy the stock again at the lower price.
The problem with wash trading is that very commonly the tactic has nothing to do with selling to get a tax break on a loss. It has to do with attempting to manipulate the market. Traders working with exchanges execute repeated wash trades which gives other traders the impression that the market is very active. This fools Bitcoin traders into thinking that a rally is coming when that is not the case. Roughly two-thirds of all Bitcoin trading on some exchanges are wash trades. We expect to see enforcement of this issue which will result in more reliable trading of the Bitcoin market.
New Regulation-compliant Crypto Exchange – SlideShare Version
