Regulation
How Crypto Regulations Impact Exchanges
In the last two years, cryptocurrencies they have become widely accepted by the general public and large companies. With growing interest and a larger user base, governments have also turned their attention to cryptocurrencies. This is evident in more regulations and stricter tax practices.
The US government has become one of the strictest regulations regarding cryptocurrencies, and as a result, some cryptocurrency companies have abandoned their use. Cryptocurrency exchanges feel the effect of the new regulations more than any other business since they are the middleman for investors purchasing cryptocurrencies.
How do cryptocurrency exchanges work?
THE central exchanges for cryptocurrency trading function as a platform for users to buy and sell cryptocurrencies. In this regard, they are similar to foreign currencies or stock exchanges. Centralized exchanges operate under central authority, meaning transactions do not occur directly between peers. Some of the largest exchanges, like Binance or Coinbase, work this way.
Cryptocurrency exchanges have a responsibility to ensure the security of user funds and data through robust measures. They must comply with regulatory standards, prevent fraudulent activities and maintain transparent operations. Exchanges must also ensure liquidity, fair trading practices and customer support.
Are cryptocurrencies securities?
One of the areas that has come under scrutiny with the new regulations is the very nature of cryptocurrencies. The Securities and Exchange Commission (SEC), which regulates the work of cryptocurrency exchanges, does not consider cryptocurrencies to be legal tender. Instead, it treats them like securities, like bonds or stocks.
Opponents of this approach view cryptocurrencies as commodities because they are used to store value and facilitate trade. If cryptocurrencies were treated like securities, exchanges would not be able to continue providing their services as they are not set up to operate in this industry.
Lawsuits
Due to the new regulations, the SEC has already filed lawsuits against several cryptocurrency exchanges. The largest exchanges, Binance and Coinbase, have already been subject to legal action. Some cryptocurrency exchanges have said publicly that they expect lawsuits to be filed against them as well.
The SEC said he violated the law by operating without the right to trade securities. The question concerns the definition of cryptocurrencies. Since most exchanges allow their users to purchase many different cryptocurrencies and use one currency to purchase another, governments will view this action as a purchase of securities rather than an exchange of one currency for another.
Leave the United States
Some cryptocurrency exchanges have already decided to leave the United States due to these political changes. They are moving to the EU or, in some cases, to Saudi Arabia or Hong Kong to find new markets and away from the United States and its regulators.
Just a few days ago, Robinhood, the California-based investment app, purchased a European cryptocurrency exchange, Bitstamp, to move its business to Europe. The purchase was worth about $200 million and included folding Bitstamp into Robinhood services.
Effect on the markets
The increased scrutiny also has a negative impact on the markets. Since investors cannot be sure whether they can use cryptocurrency exchanges, they may be less inclined to trade. It can lead to declines in value, at least to some extent. Uncertainty is usually the worst quality for a cryptocurrency market.
Broadly speaking, the cryptocurrency market is doing well, especially now that traditional financial institutions are entering it. However, rumors about upcoming changes in regulations are also widely spread and will increase as laws make their way through the courts and some cryptocurrency exchanges leave the United States.
Increase in costs
The new regulations will impose new costs on cryptocurrency exchanges. Most of these concern user security and privacy. Measures taken by governments are similar to those used to prevent money laundering and some may include “Know Your Customer” laws.
Exchanges that must comply with these laws are likely to pass these costs on to users and investors. In the long term, this will make cryptocurrency trading a little less accessible.
Market access and geographic restrictions
When cryptocurrencies first arrived on the financial scene, one of their most significant advantages was the ability to transact no matter where you were. Cryptocurrencies do not rely on central authority, allowing users from countries with strict regulations to make online payments without detection.
Market access will suffer if countries set different regulations based on their political and cultural differences. At this point, it appears that the EU and Asian markets will be more liberal when it comes to cryptocurrency exchange regulations, while the US is set to be conservative and restrictive.
Increased regulatory efforts are affecting cryptocurrency exchanges mostly in a negative way. Now that cryptocurrencies will be widely used, markets will have to adapt to stricter rules. In the long and medium term, this means that trading could become more expensive and a little less accessible.