Crypto Trading: Regulated exchanges recommend six principles to build trust and stability

The World Federation of Exchanges (WFE), the global body for exchanges and central counterparty clearing houses (CCPs), has set out six principles to promote sound marketplaces in crypto trading in a new report.

The report, drawing on the collective experience of regulated market infrastructures as trusted guardians of public markets, makes six recommendations considering issues that continue to affect the nascent crypto-currency industry which has suffered several high-profile controversies and collapses.

According to a statement obtained from WFE by Nairametrics, by applying regulatory principles that have been proven via established, trusted market infrastructures, governments and regulators can aid the crypto-trading sector to grow whilst protecting investors and ensuring orderly, fair, and transparent markets.

The WFE’s analysis also found that whilst Decentralized Finance might bring innovation to financial products, crypto-trading platforms (CTPs) are frequently not as decentralized as they first appear, which presents some risks.

Details of the report

The WFE recommends that governments and regulators require CTPS to meet the high standards that all market participants expect and deserve.

According to the report, the recommendations are:

• “Segregate market infrastructure functions within a CTP where appropriate such as limiting CTPs trading their book or in potential conflict with their customers; and operate orderly markets by having in place systems and controls for broader risks, such as abusive trading, to protect integrity of price formation.
• Others include holding sufficient financial resources to meet expected operational stress events; facilitating compliance with best execution requirements; increasing the robustness of listing standards; and having appropriate governance and management requirements”.

In the short term, the WFE recommends that CTPs disclose their regulatory status and not describe themselves as exchanges until they are appropriately regulated and adhere to the standards listed above. All regulated market infrastructure providers adhere to the standards above.

Nandini Sukumar, Chief Executive Officer at the WFE, said:

• “The exchange industry continues to believe in the promise of crypto trading and digital assets and is working with all stakeholders to evolve the market structure and standards to the level necessary to facilitate growth and trust in these markets. 
• These six key principles should be a checklist for any CTPs that are serious about meeting the standards expected of a credible operator of markets. Observing the standards will not only safeguard markets, but it will also enable the sector to grow.”

Richard Metcalfe, Head of Regulatory Affairs at the WFE, said:

• “Governments and regulators helped to shape the ethos of the current market infrastructure so that it operates in the trusted manner it currently does. The same logic must apply to CTPs, whether centralized or not, to prevent the significant risks and realities we have seen that can, and do, harm investor trust.”

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