Regulators Get Tough on Online Trading Platforms

Both the blockchain and low-cost trading apps have had their share of ups and downs during the global pandemic. In addition, over the last few months, we have seen financial regulators tighten their grip on these firms, both mobile Stock trading applications and Crypto exchanges.

In June, the U.S. Financial Industry Regulatory Authority delivered its most significant financial penalty ($70 million) against the retail trading app Robinhood; this fine came even while they continue to face scrutiny from the SEC regarding its business practices.

While Robinhood looks to shake off the fines and continue plans to list on the Nasdaq under the ticker ‘HOOD’, Binance, the world’s largest crypto exchange, found the U.K. Financial Conduct Authority (FCA) and Ontario Securities Commission (OSC) ban their services as they did not comply with local regulations.

These bans had mixed results; for the U.K. users, the ban affected a subsidiary company not actively offering services in the U.K. However, some banks, including Barclays & Santander, took the FCA warning seriously and stopped all GBP payments to the Crypto exchange. For Ontario users, Binance decided to close up shop entirely and advised locals to close out all active positions by December 31, 2021.

In the United States, the new chair of the US Securities and Exchange Commission (SEC) Gary Gensler called on Congress to give the agency more authority to police cryptocurrency trading, lending and platforms, a “wild west” he said was riddled with fraud and investor risk.

With a low barrier to entry, many young investors have flocked to these services.

Whilst the mainstream media have latched on to the FUD (Fear, Uncertainty, and Doubt), boosting their readership and actively raising awareness of these services – I guess no PR is bad PR; if people believe there’s money to be made…

So, is it really the wild west out there?

Binance processed $5.4tn in “spot” crypto transactions this year, according to crypto and blockchain research group TheBlockCrypto. So as the most significant player, how are they ensuring they meet regulations?

According to a recent article in the FT & Binance official Twitter feed, Binance declared it is rapidly hiring more compliance staff and using advanced tools to block any potential illicit activity from its systems. They stated, “We take our legal obligations very seriously”, they continued “we have worked hard to build a robust compliance programme”.

Binance, is also one of the first to deploy AML (Anti Money Laundering) technology to help identify suspicious activity. In their case CyberTrace, a software platform that interpreters attribution data from active intelligence gathering, public and private intelligence sources, and open-source intelligence (OSINT), flagging any data to compliance teams.

Firms are also working with the police authorities when required, for example, the U.K. South East Regional Organised Crime Unit recently praised Binance for its efforts in helping them to fight bad players in cyberspace concerning the supply of Class A Drugs via the Dark Web.

The U.K. FCA are also investigating issues with crypto firms.

A freedom of information request to the FCA showed that 51 new enquiries were opened concerning unauthorised cryptocurrency businesses since September 2019. It’s hard to know if this number will grow year on year or decrease as a better understanding and new regulation of this socioeconomic experiment helps protect investors.  Time will tell.

Even industry bad boys recognise the necessity and benefits of strong regulations.

In a recent interview Jordan Belford (infamous Wolf of Wall Street), he called for the “Massive” regulation of Crypto and that only with this could we see full mainstream adoption.

The Regulated Future of online platforms

As global online stock and crypto marketplaces evolve and begin to mature, more regulations will emerge as governments catch up to the next generation of financial services.

New regulations will seek to reduce risk in the marketplace; however, the challenge remains if financial services become further decentralised; who’s rules and regulations do you follow?

For the firms working in more exotic assets classes, it is fast becoming ever more critical to ensure all the channels of communications trader’s use are captured in real-time. Most importantly, related data must be secure, accessible and searchable and ideally not stored in siloed databases.

As the sheriffs of their respective financial territories, the regulators aim to maintain the integrity of the financial markets. The authoritarian actions seen in the last few weeks show they are ready to take firm control of their plains.

Key Takeaways

Regulations– Understand the risks and stay informed of changing rules.

Reaction – Ensure you can meet Governance controls, cultural habits, and have the tools needed to stay ahead of bad players in real-time. Investigations are often complex so being able to report on communications is very helpful.

Protection– Some online financial services are not registered with the UK Financial Conduct Authority. Always use a firm that is on the registry or temporarily registered with the FCA or equivalent body.

Visibility – If you are responsible for trading data, make sure you can access all your data from one pane and be ready to reconstruct when needed.

Disclaimer – This Content is for informational purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Values correct as of August 2021.