You wouldn’t use an unregulated bank, so why should you use an unregulated crypto exchange?

When it comes to finance, there will always be an element of risk, otherwise there would be no reward. All investors know and tolerate this (though retail investors can usefully be reminded by risk warnings such as “the value of your investment may go down as well as up”). The most sophisticated traders have developed complex models to identify and manage such risk.  

What is intolerable, however, are structural risks relating to the markets or other mechanisms by which you invest. Models do not, and should not have to, anticipate the possibility that the very exchange on which you are trading is a scam, or that you won’t end up with the investment you thought you were buying. If you line yourself up for a risky jump shot in basketball, you are prepared for the possibility that you will miss. You are not prepared for, and should not even have to consider, the possibility that when the ball will go through the hoop, the officials will deny you the points and then steal your ball.  

In the traditional finance world, this is uncontroversial. Over many decades, including most recently following the 2008 financial crisis, sophisticated frameworks for regulating and supervising banks, investment firms, exchanges and other participants have been developed. Of course, there is always more to be done, and the rules are constantly being reviewed and amended. But the principle, namely that the job of the legislature is to ensure that the “rules of the game” are clear and fit for purpose, and the job of the regulator is to ensure that only companies that adhere to the “rules of the game” are allowed to participate, is accepted by all. 

If crypto is to be taken seriously as a mature and investable proposition for institutions and retail alike, this very quickly needs to be the case for exchanges, token issuers, and other service providers in that space too. Investors can and do make complex assessments of risk/reward, in order to arrive at informed investment decisions.     

The manner in which assets are regulated and protected should be a given, not another factor to weigh up. The risk should be a commercial one, focused on the potential of the instrument or asset you are buying, not a structural one related to the way in which you buy that asset, or the market in which you invest. In other words, you should know for certain that you’re going to get what you paid for, even if you don’t know how well it will perform.   

After all, you wouldn’t put your money in an unregulated bank, so why should you put your money on an unregulated crypto exchange?   

Traditional financial institutions and crypto institutions (including exchanges) hold many similarities in the sense that there is an onus placed on them to protect customers' financial assets. Any misconduct by these financial institutions can cause devastating repercussions for those who put their trust in them, so regulation is crucial in holding them to account.  

There are strong parallels to be drawn between the global financial crisis of 2008 and the recent crypto crash of 2022, which caused multiple exchanges to freeze customer assets or — in some cases — even become insolvent due to volatile market conditions. Just as millions of people attempted to access their bank accounts only to discover funds had been frozen during 2008’s financial turmoil, a similar story played out in May 2022 as millions of crypto accounts had their funds frozen or lost completely.   

Trading platforms filed for bankruptcy, stripping millions of people of their crypto assets, with some customers still waiting to be compensated for their losses. Therefore, there should be absolutely no hesitation in regulating crypto exchanges with the same rigour that traditional banks face, not least to avoid this situation repeating itself, but for the good of the market and DLT’s wider adoption in general.  

Studies show that there are now more than 13,000 cryptocurrencies and over 600 crypto exchanges in the world, with a global market cap exceeding $867 billion at the time of writing, so it has never been more important to embrace crypto regulation than right now. In the UK alone, reports show that over $190 million was lost in 2021 to crypto-related scams, illustrating the global need for effective regulatory practices.   

Crypto, and the blockchain technology behind it, is now simply too significant, and too widespread, for regulators to ignore. The simple fact is that if legislators and regulators do not create a properly regulated, respectable path for legitimate crypto companies to offer services to the public, all that happens is that illegitimate ones find nefarious ways to scam and hoodwink the very people that the rest of us are trying to protect. It is naïve to think that blanket bans protect consumers. Regulators and policy motivators ignoring crypto through fear of presiding over some kind of scandal are in fact abrogating their responsibilities to protect consumers and provide a safe way to access to the phenomenal opportunities crypto could afford them.  

The European Union has welcomed regulation as it recently finalised the legal text for the Markets in Crypto Assets Regulation (MiCA) legislation, which aims to regulate the digital asset space across the EU. Meanwhile, the UK has also progressed with the Financial Services and Markets Bill which aims to position them as a global hub for crypto asset technology while introducing clear regulation surrounding their trading.  

It is time that nations and regulatory bodies finally crack down on irresponsible crypto participants to ensure users’ financial security and protection. Just as a bank needs to be regulated, it is essential that crypto service providers are regulated too. Fortunately, many countries have taken significant steps in protecting their citizens from the dangers of unregulated crypto service providers. Liechtenstein and Bermuda can be taken as two prime examples of jurisdictions paving the way in crypto regulation. Liechtenstein became one of the first EEA members to specifically regulate the token economy by passing the Token and Trustworthy Technology Service Providers Act in October 2019, which enabled the tokenization of all types of assets under the “token container model”, which has now been effectively adopted in MiCA. Similarly, Bermuda introduced new laws to regulate initial coin offerings, digital assets, and insurtech back in 2018.   

But it’s not just enough to have good regulations written down, they need to be properly enforced as well. Sophisticated and experienced regulators are a good start, but even with the expertise of the FMA in Liechtenstein (which has a strong reputation regulating private wealth and banking in an effective manner) and the BMA in Bermuda (which has a similar reputation for the insurance sector), we have found that there is a steep learning curve in terms of understanding the technology, processes, risks and opportunities of crypto.  

The public must stop leaving their financial assets in the trust of unregulated institutions and, equally, governments and regulators should not facilitate the possibility of them doing so by cracking down on improperly regulated exchanges. At Bittrex Global, we are building the future of crypto to be innovative, secure and regulated. Our commitment to these principles needs to be echoed by our competitors to ensure that DLT becomes a pillar of broader society as we move towards the future of crypto.