Exchange federation promotes regulation of crypto trading and integration with traditional finance (TradFi).

Exchange federation promotes regulation of crypto trading and integration with traditional finance (TradFi).

The Potential of Crypto-Asset Trading Platforms in the Real Economy: Insights from the World Federation of Exchanges

The blockchain industry has been gaining significant attention and recognition in recent years due to its potential to revolutionize various sectors of the economy. One of the key players in this industry is crypto-asset trading platforms (CTPs), which have caught the interest of the World Federation of Exchanges (WFE). The WFE, an international trade association representing traditional financial exchanges, believes that CTPs can play a more substantial role in the “real” economy and society as a whole. In a paper released on September 28, the WFE shared some insightful observations about CTPs and made suggestions for regulators to ensure their proper functioning.

The Importance of Regulation for CTPs

While advocating for the integration of distributed ledger technology (DLT) into traditional finance (TradFi) exchanges, the WFE emphasized the importance of regulation for CTPs. It proposed six principles that regulators should consider when overseeing CTPs, with the first principle being the segregation of functions to prevent trading against customers. The WFE echoed the concerns raised by the United States Securities and Exchange Commission chairman Gary Gensler, who has frequently highlighted this issue. Until CTPs meet these standards, the WFE suggests that they should refrain from labeling themselves as exchanges.

To ensure a thriving market for CTPs, the WFE believes that these platforms should embrace a certain level of regulation. By adhering to regulatory standards, CTPs can enhance the appeal of their markets, build trust with customers, and protect the interests of all stakeholders involved. The WFE’s call for regulation reflects a growing recognition within the blockchain industry that proper oversight is crucial for long-term sustainability and mainstream adoption.

Mutual Benefits of DLT Integration

The WFE acknowledges the potential benefits that can arise from integrating DLT into traditional financial exchanges. It contends that by making it difficult for regulated institutions to offer crypto-asset services, regulators risk pushing this business into the hands of new entrants with limited experience and potentially into unregulated entities altogether. The WFE encourages regulators to consider the mutual advantages that DLT integration can bring, such as improved efficiency, transparency, and security.

The Nuances of Decentralized Finance (DeFi)

The WFE also shares its perspective on decentralized finance (DeFi). While recognizing that DeFi operates differently from both TradFi and centralized finance (CeFi), the WFE argues that the differences are not as stark as they may seem. It highlights that the nature of a platform where buyers and sellers interact inherently makes it a central entity. For instance, the WFE points out that the Ethereum Merge, the transition from proof-of-work to proof-of-stake consensus, was largely driven by the centralized team at the Ethereum Foundation.

The WFE suggests that regulators should focus on regulating decentralized applications (DApps) rather than the underlying protocols themselves. This approach would allow for the steady progress of innovation and development within the blockchain industry while ensuring that consumer protection and market integrity are upheld.

Endorsing Regulatory Efforts

In addition to its own principles for regulating CTPs, the WFE commends the Financial Action Task Force (FATF) for its initiatives to apply Know Your Customer (KYC) regulations, particularly the travel rule, to the crypto industry. The travel rule requires virtual asset service providers (VASPs) to collect and transmit customer information during transaction transfers, thereby strengthening efforts to prevent money laundering and illicit activities.

The WFE also endorses the International Organization of Securities Commissions (IOSCO) Principles for Secondary and Other Markets, which aim to raise standards within the crypto market. These principles provide a framework for effective regulation and supervision, promoting fair, efficient, and transparent markets.

Embracing the Potential of CTPs

The observations and recommendations put forward by the World Federation of Exchanges shed light on the immense potential of crypto-asset trading platforms. As CTPs continue to evolve and establish themselves as credible operators of markets, effective regulation will be essential to ensure their integrity, protect investors, and foster the development of a robust blockchain ecosystem.

By adhering to the six principles proposed by the WFE, CTPs can build trust and confidence in their platforms, attracting a broader range of participants, including institutional investors. Simultaneously, regulators must strike a balance between oversight and fostering innovation to prevent pushing crypto-asset trading into unregulated entities.

As the blockchain industry advances and matures, regulators and market participants must work hand in hand to harness the transformative potential of blockchain technology in the real economy. With proper regulation, CTPs can be at the forefront of this transformation, facilitating secure and efficient financial transactions while promoting trust and accountability.

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