Cryptocurrency has a huge problem that has netted investors well over a billion dollars in losses, and that is lack of accountability among exchanges. There has been countless exchanges cease operations and flee with customer funds, as well as more elaborate schemes. Since exchanges are such a vital component to the interchangeability of cryptocurrency, it’s important that we have some oversight to prevent exchanges from engaging in questionable or illegal practices, which can have a serious impact on the investments we are trying to protect. The content of this article aims to touch on some of the important topics which need to be addressed if we expect smart regulation to protect the consumer, rather than burdensome regulation that will stifle growth and innovation.


Anything for the Profit

At a glance it would appear that a lot of exchange operators really don’t care what people are trading, as long as they are paying fees. It is in their short term best interest to have as many listings as possible so they receive more fees. These types of exchanges are prone to facilitation of pump and dumps, illegal ICO’s, insider trading, creating fake volume, as well as a litany of other suspect schemes engineered by groups that are strictly motivated by profit (not to imply I don’t like making money). I won’t name names, and this certainly doesn’t happen on all exchanges, but as many of you who have been in the industry for a while will agree on, this happens far more often than we’d like to admit.

Excessive listing fees, and paid voting are also large problems. Exchanges can charge thousands of dollars just to list your currency, and in some instances you can find yourself having spent a fortune only to find out you didn’t meet the unclear listing criteria. To the best of my recollection, now defunct Mintpal cost hundreds of Bitcoin to buy your way on through their ‘voting’ (bribing) system, meaning you could have wasted what is now hundreds of thousands of dollars for nothing.


The Case for a Designated Global Regulatory Body

The case for a global regulatory body is obvious to anyone who knows a thing or two about cryptocurrency – it is borderless and operates in many different legal jurisdictions with differing laws. As it stands people can hide behind one country’s lack of regulation while remotely operating in markets with strict regulations, leaving authorities powerless, even in cases of severe wrongdoing.

An agency for exchange customers to report malpractice is also severely needed. At this point it is unclear where they are supposed to report, which can be confusing when reporting exchanges in different legal jurisdictions.


Minimum Standards

If I were to make recommendations on which general areas regulators (or a non-partisan standards council) should begin drafting standards, this is what it would include:

  • Minimum volume requirements for margin trading.
  • Minimum exchange reserve balance to cover customer losses.
  • Security standards and benchmark testing.
  • Maximum transaction time standards.
  • Currency listing standards.
  • Employee bonding/insurance to cover losses from dishonest workers.


Token Securities Issuance : If it Walks Like a Duck, and Quacks Like a Duck, it’s Probably not a Goose

A battle of semantics has been raging among the industry and regulators over the issuance of tokens that represent something of financial value. Those in the industry say that since these representations of value are on a new decentralized platform, they don’t have to classify themselves into an existing category, even one as broadly defined as securities. Regulators say that these tokens are forms of securities, and as such the same obligations should apply. Some blockchain based platforms have sidestepped registration and reporting obligations altogether by asserting themselves to be a ‘product’ as opposed to a security.

Defined by the SEC, a security is : any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

A strong case can be made in precluding cryptocurrency from this security designation, and although the basic infrastructure behind it has the potential to fulfill multiple roles, when it is functioning as a currency it is much more similar to fiat money than securities. Neither fiat nor cryptocurrency have intrinsic value by themselves, whereas a security’s price is derived from something of value, whether that be positive or negative value. In my opinion the dividing line is where the products value is derived from at the time of issuance; is it a representation of something of underlying value, or is it in itself the item of value?

Any exchange that trades securities in the US must register with the SEC in the US, and the same goes for most developed nations. Click here for more information on registration and reporting requirements in the US.


Anti Money Laundering

Most exchanges still have little to no policy or precautions to prevent money laundering, such as the tiered customer verification, which requires you to prove your identity more comprehensively before you can move larger amounts of money.


Auditing of Internal Practices and Procedures

Greater auditing of internal practices and procedures that are conducted by exchanges could prevent situations like Mt Gox from happening by pre-emptively identifying problems before they become catastrophic.


A Duty to Protect our Industry

Exchanges cooperating with authorities in appropriate instances can help stem illicit activities conducted in cryptocurrency. Staying on top of this is the responsibility of every law abiding crypto-owner, because when we allow illicit activity to exist, oppressive regulation and bad PR are sure to follow.


Evasion, Excuses, and Escape – Exchanges That Took the Money and Ran

Mt. GoxInititially blamed on a hacking, at what was the largest Bitcoin exchange at the time. This was the single largest score in the history of cryptocurrency.

The hunt for the missing Bitcoin is still ongoing, and after serving a short stint in prison former CEO Mark Karpeles still insists his innocence. Numerous details surrounding the incident still remain unclear.

MintpalInside job results in the theft of 3700 BTC. They ceased operations soon after.

CEO Ryan Kennedy was reportedly arrested in the UK later on and forced to pay damages of 750 BTC to former customer, Syscoin.

Cryptsy13,000 BTC and 300,000 LTC (Litecoin) were allegedly stolen in July 2014.

It should also be noted, at the time CEO Paul Vernon was going through a divorce, and his soon to be ex wife would have been entitled to half of Cryptsy. During divorce hearings, Vernon told a judge he expected Cryptsy to fail due to lack of transaction fees.

BitfinexDidn’t take the money and run, but suffered a security breach and theft. Bitfinex spread the 120,000 bitcoin loss across all of their customers accounts.