Over the past several years, a multitude of projects and companies have emerged to provide products and services that facilitate the use of cryptocurrency for mainstream users.
Companies providing interfaces between public blockchains, traditional finance, and various economic sectors add significant value to the industry as they provide a means for capital flow and on-ramping of new users. Of the many sectors in the ecosystem, the exchange sector remains the largest sector both in terms of the number of companies and employees.
As of July 2018, over 200 cryptocurrency exchanges are listed on CoinMarketCap, with billions of dollars worth of cryptocurrencies being bought and sold every day. Many of these trades are high-value and can take up to thousands of smaller transactions to complete. Despite more than 1,600 cryptocurrencies in existence, bitcoin holds the biggest market share of approximately 42%.
A handful of large exchanges and four national currencies (USD, EUR, JPY and CNY) dominate global cryptocurrency trading volumes. Exchanges that accept fiat currencies can act as gateways for users to buy their first cryptocurrencies via bank transfer, while operating under tighter regulations compared to those which accept only cryptocurrencies.
The rapid emergence of cryptocurrencies as a novel asset class means that these businesses are operating under regulatory uncertainty, with governments looking to reign in unregulated markets and protect retail investors and businesses from ill-intentioned parties. Additionally, the sheer amount of capital at stake turns centralized exchanges into honeypots for hackers and scammers looking to exploit unsophisticated investors.
In this article, we explore the landscape for cryptocurrency exchanges in US and Asia, home to the largest exchanges in operation today (Binance, Huobi, OKEx, Bitfinex, Bittrex). As well as the arena of decentralized exchanges aiming to tackle the current issues with exchanges controlled by a single party.
Following its ban on initial coin offerings (ICOs) and domestic fiat-to-crypto order book trading in September 2017, the People’s Bank of China (PBoC) has further clamped down on cryptocurrency trading regulations by monitoring internet traffic to offshore platforms. In early March, local authorities forced social media messaging platform WeChat to shut down accounts belonging to select offshore exchanges.
While the Chinese government continues its efforts to stifle domestic cryptocurrency trading, it has continued to support local blockchain projects and public blockchain protocols like Ethereum. In April 2018, the government of Hangzhou backed a $1.6 billion fund to finance emerging startups working on commercializing and implementing blockchain-related solutions. Two months later, China Central Television (CCTV), reported that the blockchain has the potential to become 10 times the value of the Internet, further demonstrating the government’s optimism for the technology itself.
Major Chinese exchanges continue to thrive, shifting its focus to over-the-counter (OTC), crypto-to-crypto trading, and relocating to Hong Kong and other countries with a more lenient stance towards exchanges.
Amongst those undergoing post-ban revamp is the world’s oldest cryptocurrency exchange BTCC, which began operations in 2011. After shutting its doors in China and relocating to Hong Kong and London, the company announced in July 2018 that it will release a revamped exchange with support for crypto-to-fiat and crypto-only trading pairs including bitcoin, bitcoin cash, litecoin and ethereum.
Other exchanges like OKEx and Huobi continue to process over $1 bln on a daily basis, their relocation to Hong Kong having kept the gateway open between Chinese cryptocurrency traders and the global market.
Regulations aside, the domestic demand for digital assets is increasing daily, with trading volumes remaining high thanks to overseas platforms. The Chinese government remains supportive of blockchain projects via domestic initiatives and publicly optimistic statements. It remains to be seen how it moves forward with regulatory frameworks for domestic fiat-crypto exchange.
South Korea has emerged as another hotbed for cryptocurrencies. Leading trading platforms in the region include Upbit, Bithumb, Korbit, and Coinone. The Korean Won ₩ also commands the fourth position as far as currency trades with bitcoin (BTC) trade volumes.
Earlier this year, Korean exchanges Bithumb and Coinrail were victims of a hack, losing $30M and $40M in cryptocurrencies respectively. The South Korean government has long been looking to approach the cryptocurrency sector with practical regulations and policies, and as of early July, it officially came to consensus to recognize crypto exchanges as regulated financial businesses, creating a new industry dedicated to cryptocurrency trading platforms.
Under this new regulatory framework, cryptocurrency exchanges will need to comply with strict Know-Your-Customer (KYC) rules, Anti-Money Laundering (AML) regulations, as well as customer verification policies. Exchanges will likely be required to drastically enhance their security measures and overhaul internal operations to remain in compliance with new policies. Soon, smaller exchanges will not even be permitted to operate regionally unless they successfully obtain approval from cybersecurity agencies and the department of financial intelligence.
Furthermore, local authorities are planning to facilitate the development of the blockchain to ensure the technology can be widely implemented across major industries such as game development, computer programming, hosting, decentralized exchanges, and dApps.
This is a significant step for cryptocurrencies that is going to have far-reaching implications. Moving forward, startups operating within the blockchain sector of South Korea will fall under one of the nine categories created by the government. Under the new framework, the Financial Services Commission (FSC) will have direct control and authority over the cryptocurrency exchange and development sector.
Singapore has been relatively lenient when it comes to cryptocurrency trading. While the Monetary Authority of Singapore (MAS) did issue warnings in May to eight digital token exchanges for facilitating unauthorized trading of currencies that classify as securities or futures contracts, a light stance compared to the crackdown on exchanges in China and Japan.
However, the country’s perceived openness to cryptocurrency exchange does come with its risks. Cybersecurity expert Adam Meyers of CrowdStrike has raised a word of caution that this perception brings with it certain risks as it draws attention from cybercriminals wishing to exploit trading systems lacking a robusticity in security measures.
The government’s less restrictive stance towards crypto exchange regulation has given room for Singapore-based exchanges to grow and innovate. Huobi, a Chinese exchange based in Singapore recently announced that they plan to shift its operations on to the blockchain, becoming a Decentralized Autonomous Organisation (DAO) after the project is complete. Communications giant LINE announced plans to open a cryptocurrency-only exchange in the region, offering a trading platform between over 30 tokens including bitcoin, ethereum, bitcoin cash and litecoin.
After Tokyo-based cryptocurrency exchange Coincheck lost $530M in a hack in January, the Financial Services Authority (FSA) sent business improvement orders to other exchanges including Bit Bank, bitFlyer, and QUOINE. The agency also inspected other platforms seeking to protect customers and address the security shortcomings of a nascent but promising industry.
Japan’s legislation currently regards cryptocurrencies to be in the same category as electronic cash. Under the Financial Instruments and Exchange Act (FIEA), crypto will be treated as a financial product, opening the possibility of introducing crypto derivatives like exchange traded funds.
The Australian government has mandated for its cryptocurrency exchanges to abide by new anti-money laundering policies starting mid-May 2018. “Digital currency exchanges” must now register with authorities and commit to various identity checking and reporting processes. The first exchanges to be licensed were BTC Markets, Independent Reserve, and Blockbid. Australian Transaction Reports and Analysis Centre (AUSTRAC) CEO Nicole Rose believes that the reform will help prevent money laundering, terrorism financing, and strengthen consumer confidence in the sector.
Australia’s exchange industry has also attracted big names from the traditional finance space. On July 12, Business Insider Australia reported that Ben Ingram, former PriceWaterhouseCooper (PWC) executive will be joining bitcoin.com.au as its CEO. Ingram hopes to expand its exchange services to include other cryptocurrencies as well as developing crypto-based financial products in areas such as superannuation.
The AUD is currently ranked 13th in daily BTC transaction volume. While the government is trying to gain control of cryptocurrencies in the country and seal the remaining loopholes, Australia has indicated a positive outlook on digital currencies – growing and incorporating blockchain technology while protecting its citizens.
Beyond the aforementioned centralized exchanges, which are owned and controlled by a single party, there is a vibrant ecosystem of decentralized exchanges (DEX) and protocols emerging with a mission to leverage the blockchain to give users more control over their funds.
Orders on decentralized exchanges are settled on-chain. Currently, the majority of DEXs support Ethereum based tokens, but lack the interoperable support across blockchains. Decentralized exchange protocols like Blocknet are working on cross-blockchain trading solutions for other parties to build on top of.
Due to a relative lack of users and liquidity, markets on DEXs are more volatile, with radical changes in price when large orders are placed. However, as usability improves and technical infrastructure becomes more stress-tested, DEXs are poised to offer a more secure, decentralized, and censorship-resistant means of cryptocurrency exchange.
Despite the turbulent regulatory landscape in Asia, cryptocurrency trading and exchange service providers have continued to bloom. The region’s residents have contributed massively to the crypto economy. While government entities in each country has diverged in its approach to crypto exchange regulation, they are generally supportive of domestic blockchain projects – increasingly investing time, resources, and capital in the space. It remains to be seen how effective proposed regulations will become as authorities, industry veterans, and entrepreneurs work together to protect investors while allowing.
*This article is jointly released by @nichanank and @yureehong17 on Twitter.
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