Today the World Federation of Exchanges (WFE) published a paper aimed at promoting “sound marketplaces” in the crypto sector. WFE is the global body for exchanges and central counterparty clearing houses (CCPs). Crypto trading platforms (CTPs) are the focus of the paper, with the WFE deliberately avoiding referring to them as exchanges.
“The exchange industry continues to believe in the promise of crypto trading and digital assets and is working with all stakeholders to evolve market structure and standards to the level necessary to facilitate growth and trust in these markets,” said Nandini Sukumar, CEO of the WFE. “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 WFE doesn’t want to see regulators smother the sector. It wants to encourage the sector to grow while protecting investors. However, it is also keen on having a level playing field, as current crypto platforms are generally unregulated. They perform functions that would not be allowed in traditional finance (TradFi). Hence, they want to see the principle of ‘same activity, same risks, same rules’ applied.
“If you make it impossible for regulated institutions to run services in crypto-assets, you effectively chase this business out of the institutions who know how to run it properly, and into the shadows, where it may be run by new entrants with limited experience,” the paper states.
One of the biggest differences with a crypto exchange is the array of roles that it usually performs within a single entity. That includes providing an exchange, but also trading on its own account, a clear conflict of interest. Additionally, it takes on the role of broker-dealer, clearing house and custodian. The first of the six recommendation address this issue.
The six WFE crypto principles
- Segregate market infrastructure functions within a CTP where appropriate such as limiting CTPs trading their own book or in potential conflict with their customers;
- Operate orderly markets by having in place systems and controls for broader risks, such as abusive trading, to protect integrity of price formation;
- Hold sufficient financial resources to meet expected operational stress events;
- Facilitate compliance with best execution requirements;
- Increase robustness of listing standards;
- Have appropriate governance and management requirements.
Additionally, the WFE doesn’t want crypto exchanges to describe themselves as such until they become regulated and adhere to the six principles.
DeFi also received attention in the paper. “A platform where buyers and sellers meet is, by its very nature, a central entity,” the paper states. It suggests applying regulations at the DeFi application level rather than the protocol layer. And it notes that individuals or entities write the code and they could be ‘hooked’ in for regulation.
Some of the assertions in the paper are controversial in the crypto world. For example, it says Ethereum’s Merge was pushed by a team at the Ethereum Foundation, demonstrating “that a central actor, or set of actors, can take control of a so-called decentralised app.” Additionally, it refers to XRP as a public permissioned network with an “entity managing the DLT infrastructure (eg, Ripple).”
Meanwhile, the WFE recently surveyed its members and found that 12 of the 29 respondents have some type of crypto involvement. However, only one provides direct access.