Cryptocurrencies (aka Cryptos) are quickly turning into a global phenomenon. While the concept is still fairly new to most people, crypto exchanges are becoming hugely popular, all with their hard-to-resist offerings. However enticing, it is still difficult to know how crypto exchanges are defined and treated by regulators.
Is cryptocurrency a currency or a piece of software? Is it an equity? If so, should it be regulated? And if this happens, are crypto exchanges ready to meet the demands of regulators?
The World of Cryptocurrency
Crypto exchanges are nothing like the exchanges we know. They are like retail websites built with payment systems and CRMs. In crypto exchanges, lines seemed to be blurred between margin trading and physical trading.
Cryptos are new and so many expect these platforms to operate faster, to have immediate settlements, and all without any risk involved. Unfortunately, they don’t work that way. For instance, Bitcoin operates on a public ledger, called the block-chain, to record transactions. The block-chain confirms to the rest of the network that transactions have taken place.
While transactions may be recorded fast, they will not be considered valid until miners have come up with a proof of work. With the growing popularity of Bitcoin, its public block-chain continues to grow bigger while only allowing a certain amount of data. As this happens, transaction validation could take anywhere from 10 minutes to more than an hour. What happens to the trade if the validation fails? Unfortunately, there is still no exact answer to this, hence the risk.
Bitcoin may be the cryptocurrency of the moment, but there is an increasing number of other currencies gaining popularity, like Ethereum, Litecoin and Ripple which are all experiencing record trading volume.
Regulating Crypto Exchanges
There are a lot of factors that come into play when talking about regulating crypto exchanges. It is important to determine how cryptocurrency is viewed from a regulatory standpoint, as this can affect the value of the cryptocurrency. Likewise, it can also have an impact on how the block-chain technology, such as that of Bitcoin, can thrive within a certain jurisdiction. For instance, if a regulatory body in a particular country bans cryptocurrencies, this will drive prices down.
As cryptos gain in popularity, regulators across jurisdictions may need to catch up with the trend and establish regulatory measures to avoid traders from being taken advantage of, as has happened in other trading ventures such as Forex and binary options.
The time will come when trading cryptocurrency will take place over official exchanges and the market will become regulated. Until then the question remains as to whether existing exchanges will need to move with the times and accept cryptocurrencies or if crypto exchanges will need to adapt to keep up with the demands of regulators.
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