WFE paper recognizes clear conflicts of interest in digital currency trading platforms

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The World Federation of Exchanges (WFE) is the global body for exchanges and central counterparty clearing houses (CCPs), and on September 28, it released a paper calling for “sound marketplaces” in the digital currency sector.

The paper refers to entities operating within the digital currency sector as ‘crypto trading platforms’ and does not want them to refer to themselves as exchanges until they become regulated and adhere to the six principles it recommends.

Furthermore, the paper highlighted the clear conflicts of interest arising from the various functions the digital currency trading platforms perform. It noted that they often function as exchanges, trade on their own books, and act as broker-dealers, clearing houses, and custodians, all within one entity. This would never be allowed in the regulated traditional finance sector.

What are the six principles the WFE recommends?

The WFE paper stated that it doesn’t want to see regulators “smother the sector,” but it wants to see a more level playing field. In order to achieve that, it wants digital currency trading platforms to follow six principles:

1. Segregate market infrastructure functions.
2. Operate orderly markets such as by controlling abusive trading.
3. Have sufficient financial resources set aside to meet stress events.
4. Increase the robustness of listing standards.
5. Adopt better governance and management standards.
6. Facilitate compliance with best execution requirements.

“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,” the paper said.

Opinion: The cryptocurrency trading platforms will never self-regulate

While the six principles outlined in the WFE paper make sense and would certainly improve things, the truth is the world has been waiting on the industry to self-regulate for a decade, and it still hasn’t happened. It won’t, either, because the crooks at the top of major crypto trading platforms benefit too much from the current setup.

Cryptocurrency exchange bosses like Changpeng Zhao make too much money listing worthless tokens, so it’s not in their interests to increase the robustness of listing standards. Rogue actors like Sam Bankman-Fried made too much money counter-trading customers and ‘borrowing’ their funds, so there’s no way they’d voluntarily segregate market infrastructure functions or control abusive trading.

While it would be great if the cryptocurrency industry were to be run by savvy business people who realized it was in their long-term interests to adopt these six principles to create a better industry long-term, there’s just too much easy money to be made grifting, and they have no incentive to do the right thing voluntarily.

So, while the WFE is right to call on regulators not to smother the industry, unfortunately, nothing short of strict regulations is going to stop the Crypto Crime Cartel. An even cursory glance at the past five years of scams, schemes, and shenanigans will confirm that.

Watch Callahan, MaGruder, Lee, and Reinhardt: Probing criminal acts