In an ETF world, crypto exchanges are more important than ever
by Ben Caselin, CMO, VALR
THE approval of the first spot bitcoin ETFs in the US was undoubtedly a watershed moment for two main reasons.
Firstly, it offered a glimmer of institutional acceptance of Bitcoin – it’s no longer an asset class to be ignored.
Secondly, the buzz around ETFs has inevitably drawn interest among the broader retail investment community – which has been a major catalyst for Bitcoin breaking through its previous all-time high.
For years, critics have labelled crypto exchanges – and indeed DeFi – as the wild west, enabling fraudulent behaviour. The constant stream of scams, hacks and high-profile collapses have only perpetuated this view. Now that US investors can gain price exposure to bitcoin via ETFs, some are questioning the role exchanges will play in crypto’s future, particularly as more markets explore ETFs.
This view is somewhat premature. On the contrary, rather than killing them off, the “mainstream-ification” of crypto via the ETF will boost the relevance of crypto exchanges in both the short and long-term. They form a critical part of the crypto ecosystem and facilitate, through enabling on-chain deposits and withdrawals, real ownership of cryptocurrencies rather than simply price exposure. It is this ownership that is critical to unlocking the benefits of crypto compared to fiat currencies, particularly in emerging markets.
However, exchanges – whether centralised or decentralised – will only have longevity if they take greater responsibility and accountability. This means they must be more proactive in self-regulation – alongside working constructively with global regulators – and act ethically in everything that they do.
The importance of self-regulation
There is general acceptance that greater regulation is needed in the crypto space. That said, regulation is complicated to say the least due to the vast spectrum of jurisdictions that have different positions on the subject. While regulators catch up, crypto exchanges in particular should take bolder steps to self-regulate.
Crypto has the potential to bring greater monetary transparency and efficiency to millions of businesses and individuals in the digital economy. As the most common gateway or “on-ramp” into crypto, exchanges must put robust safeguards in place to ensure their users are fully protected with every element of their operations having integrity whether financial, technological, or commercial.
Rather than it being mandated by global regulators, crypto exchanges can reflect on their own practices to better protect users. Listing guidelines are an obvious place to start. With a lack of a consistent set of guidelines across the industry, it is incumbent on all crypto exchanges – centralised and decentralised – to act responsibly.
This involves doing appropriate due diligence and having strict listing criteria to ensure – as far as possible – that the tokens listed on their platforms are legitimate and won’t lead to investor harm.
It’s a fine balancing act to achieve. With so much competition in the market, exchanges are under huge pressure to capture market interest by offering a vast array of tokens and ancillary services such as staking products. At the same time, if low-quality coins are readily available, this will ultimately harm the reputation of crypto overall, minimising its potential impact to transform finance.
Choosing which tokens to list isn’t the only ethical dilemma facing exchanges. For example, centralised exchanges need to manage liquidity to attract buyer and seller interest while avoiding volume inflation. The level of transparency around proof of reserves is another critical issue to manage, particularly in the wake of the FTX collapse. The exchanges that tackle these issues through the lens of accountability will survive and thrive in the ETF environment.
To begin to address these challenges, exchanges need to combine their own self-regulation with proactive engagement with regulators.
This is not just about influencing policy but also helping regulators weed out bad actors. Exchanges could, for example, collaborate with regulators to develop a global standard for whistleblowing in the crypto industry. This would include putting in place whistleblower protection and incentive mechanisms across borders to help the industry clean up its act.
Consistent trading environment benefits ALL
By being more proactive in managing the ethical challenges facing the industry, exchanges and DeFi platforms alike have the opportunity to foster a safer and more consistent trading environment. Not only does this help better protect existing users, but it could catapult a new wave of interest among businesses and individuals to the idea of digital assets.
Rather than becoming irrelevant in the ETF era, exchanges have a crucial role to play in converting the growing interest in crypto into a global community of digital asset owners. While the bitcoin ETF approval in the US has increased awareness of digital currency, it is the global exchanges that will facilitate exposure for the vast majority of newcomers – previously on the crypto fence. Most people don’t have a brokerage account, often needed to purchase ETFs. In contrast, anyone – with or without a bank account – can buy crypto directly.
It is ultimately down to exchanges to hold themselves to high standards and act responsibly in everything they do. If they fail to do so, they risk being squeezed out of the system, despite their critical role as the gatekeeper into the world of crypto for the masses.
