Trading platforms for stocks, currencies, derivatives, commodities and other financial investments are strictly regulated around the world. These trading platforms are classified as either official stock exchanges or alternative trading systems (ATS) (1). Regardless of the classification, these trading platforms are subject to strict regulations to protect investors and avoid instability in the financial system.

The emergence of cryptocurrency exchanges

However, although recently released, cryptocurrency exchanges often encounter issues related to security and money laundering prevention. Now, however, the focus of management of cryptocurrency exchanges is gradually shifting to the core activity of those exchanges, the operation of “trading”.

In March 2021, the Commodity Futures Trading Commission (CFCT) fined Coinbase Exchange $ 6.5 million for the following reasons: reckless, misleading, or inaccurate reporting and “wash trade” transactions (2) on their GDAX Platform (3). Other top crypto exchanges that are also being studied for transactions are Bitfinex and Binance.

The original design of Bitcoin – the leading cryptocurrency – was intended to be tradable without exchanges to make it easier to trade Bitcoins for other currencies such as dollars, US dollars, British pounds and euros.

However, this trading network was closed after legal problems. It has been 18 months since Bitcoin went live, the first independent exchange, bitcoinmarket.com, to allow Bitcoin to be traded for US dollars. Since cryptocurrencies have no value, a crypto exchange is not only a place of exchange between cryptocurrencies and other currencies such as US dollars, British pounds, euros, but also needs to be a place to set prices with the participation of many different trading parties, just like a set normal exchange.

Cryptocurrency exchanges play an important role in the crypto ecosystem, but because of the difference between cryptocurrencies and traditional financial assets, understanding how to control cryptocurrency exchanges is very important for countries around the world. The remainder of the article will present a summary of the regulations for the top 16 crypto exchanges ranked by cryptocompare.com in early July 2021 (Table 1) (4) of which there are seven. The bottom formed the reference price BitcoinCME (5).

Top 16 cryptocurrency exchanges

However, due to their complex structure, determining the legal status of these exchanges is very difficult. Of these top 16 exchanges, only four have strict trading rules.

Specifically, itBit, a US-based exchange, is considered to be the safest because it is regulated by the New York Department of Finance (DFS) and has to be registered as a bank. This means that the exchange is subject to strict regulations regarding banking operations.

Two other exchanges, eToroX and LMAX Digital, act as multilateral trading systems and are subject to the supervision of the German Federal Financial Supervisory Authority and the British Financial Conduct Authority (FCA). However, oversight of these two exchanges is mostly related to the usual Forex (FX) and stocks activities and not cryptocurrencies.

The Currency.com exchange, based in Belarus, is subject to the same extensive controls in terms of reporting transactions, monitoring of suspicious activity and anti-money laundering requirements as the Belarus exchange. That’s the interesting point because Belarus is not a world financial center.

There are seven exchanges that operate as licensed money services companies (MSBs) or their equivalent – including the major exchange, Coinbase. When serving as MSB, exchanges must register with the Financial Crimes Enforcement Network (FinCEN) in the US and with the FCA in the UK. However, this does not mean that the trading activities of these exchanges are subject to administration and regulation.

In contrast, there are three exchanges that are not subject to auditing. These are Bittrex based in Liechtenstein, Bitfinex based in the British Virgin Islands and Luno in Singapore. These are also exchanges that are not licensed by any major international authority in the world.

While an exchange registration can be the greatest reassurance for investors, the regulatory focus of regulators for crypto exchanges over time remains on combating money laundering and due diligence that does not focus on transactional activities, except in the case of exchanges operating in other regulated areas of financial activity. In the UK, for example, the FCA only regulates cryptocurrencies for money laundering purposes.

In addition, while there are many exchanges that claim to have a Distributed Ledger Technology license from the Gibraltar Financial Services Commission, such as Currency.com, eToro, LMAX Digital … but in reality it seems that these exchanges are rarely checked continuously after licensing (6).

Due to the lack of oversight, there have been cases of many crypto exchanges engaging in suspicious activity, such as: Some exchanges even harm the interests of investors, which economist Nouriel Roubini compared to the case where a casino operator makes a bet with a player after seeing the player’s cards (7).