WFE paper highlights evident conflicts of interest in digital currency trading platforms

The World Federation of Exchanges (WFE) serves as the global authority for exchanges and central counterparty clearing houses (CCPs). On September 28, it released a groundbreaking paper advocating for “sound marketplaces” within the digital currency sector.

In the paper, entities operating in the digital currency sector are referred to as “crypto trading platforms”. The WFE emphasizes that these platforms should not label themselves as exchanges until they become regulated and adhere to the six recommended principles.

The paper also sheds light on the inherent conflicts of interest that arise from the multiple functions performed by digital currency trading platforms. These platforms often function as exchanges, conduct trades on their own books, and act as broker-dealers, clearing houses, and custodians, all within a single entity. Such practices would not be permitted in the regulated traditional finance sector.

Now, let’s delve into the six principles the WFE recommends:

1. Segregate market infrastructure functions.
2. Promote orderly markets by controlling abusive trading practices.
3. Maintain sufficient financial resources to withstand stress events.
4. Strengthen listing standards to enhance robustness.
5. Embrace better governance and management standards.
6. Facilitate compliance with best execution requirements.

According to the paper, these six principles should serve as a comprehensive checklist for any serious crypto trading platforms aiming to meet the standards expected of a credible market operator.

Opinion: The prospect of self-regulation in cryptocurrency trading platforms seems unlikely. Despite the logical and beneficial nature of the six principles outlined in the WFE paper, the industry has yet to demonstrate any meaningful self-regulation after a decade. The top figures in major crypto trading platforms profit significantly from the current system, making it unlikely for them to voluntarily adopt more stringent listing standards or segregate market infrastructure functions. Additionally, rogue actors have exploited customers and engaged in questionable practices, further undermining the industry’s credibility.

While the WFE’s call for regulators to avoid excessive regulation is justified, it is clear that only strict regulations can effectively combat the Crypto Crime Cartel. A cursory review of the past five years highlights numerous scams, schemes, and unethical conduct. To create a better industry in the long run, it would be ideal for the cryptocurrency sector to be led by astute business individuals who recognize the importance of adhering to these six principles. However, given the allure of easy profits and the lack of incentives, it is unlikely that voluntary compliance will prevail.

In conclusion, while the WFE’s concerns are valid, stringent regulations remain the most effective means of curbing illicit activities within the industry.