How Crypto Regulations Affect Exchanges

In recent years, cryptocurrencies have gained wide acceptance among the general public and among large companies. With increased interest and a larger user base, governments have also turned their focus to cryptos. This is noticeable in more regulations and in stricter tax practices.

The US government has become one of the strictest regarding crypto regulations, and some crypto businesses have abandoned their use as a result. Crypto exchanges feel the effect of new regulations more than any other business, as they are the intermediary for investors who buy crypto.

How do crypto exchanges work?

The central exchanges for crypto trading function as a platform for users to buy and sell crypto. In this regard, they are similar to foreign exchange or stock exchanges. Centralized exchanges operate under central authority, meaning that the transactions do not take place directly between peers. Some of the biggest exchanges, like Binance or Coinbase, work this way.

Crypto exchanges are responsible for ensuring the security of users’ funds and data through robust measures. They must meet regulatory standards, prevent fraudulent activities and maintain transparent operations. Exchanges must also ensure liquidity, fair trading practices and customer service.

Are Cryptocurrencies Securities?

One of the areas under scrutiny with new regulations is the nature of cryptocurrencies. The Securities and Exchange Commission (SEC), which regulates the work of crypto exchanges, does not treat cryptocurrencies as legal tender. Instead, it treats them as security, like bonds or stocks.

The opponents of this approach see cryptos as commodities as they are used to store value and facilitate trade. If cryptocurrencies are treated as securities, exchanges will not be able to continue to provide their services as they are not set up to work in this line of work.

Lawsuits

As a result of the new regulations, the SEC has already filed lawsuits against several crypto exchanges. The biggest exchanges, Binance and Coinbase, have already been subject to suits. Some crypto exchanges have publicly claimed they expect lawsuits to be filed against them as well.

SEC claimed they violated the law by operating without the right to trade in securities. The problem is about the definition of cryptocurrencies. Since most exchanges allow their users to buy many different cryptos and use one currency to buy another, the governments will treat this action as buying securities rather than exchanging one currency for another.

Leave the US

Some crypto exchanges have already decided to leave the US due to these policy changes. They move to the EU or, in some cases, Saudi Arabia or Hong Kong as a way to find new markets and get away from the US and its regulatory bodies.

Just a few days ago, Robinhood, the investment program based in California, bought a European crypto exchange, Bitstamp, to move their business to Europe. The purchase was worth about $200 million, and it included the folding of Bitstamp into Robinhood services.

Effect on the markets

The increased scrutiny is also having a negative impact on the markets. Since the investors cannot be sure if they can use crypto exchanges, they may be less inclined to trade. This can lead to downward swings in values, at least to a certain amount. Uncertainty is usually the worst quality for a crypto market.

In the broader sense, the crypto market is doing well, especially now that traditional financial institutions are entering it. However, rumors about the incoming changes in regulations are also widely spread, and will increase as the laws come to the courts and some crypto exchanges leave the US.

Increased costs

New regulations will impose new costs on the crypto exchanges. Most of this concerns the security and the privacy of the users. The measures taken by governments are similar to those used to prevent money laundering, and some may include Know Your Customer laws.

Chances are, the exchanges that must comply with these laws will pass that cost on to the users and investors. In the long run, this will make crypto trading somewhat less accessible.

Market access and geographic restrictions

When cryptocurrencies first came onto the financial scene, one of their main advantages was the ability to make transactions regardless of where you are based. Cryptos do not rely on central authority, allowing users in countries with strict regulations to make online payments undetected.

Market access will suffer if countries set up 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 crypto exchange regulations, and the US is set to be conservative and restrictive.

The increased regulatory efforts affect crypto exchanges mainly in a negative way. Now, when cryptocurrencies are widely used, the markets will have to adapt to stricter rules. In the long and medium term, this means that the exchanges may become more expensive and somewhat less accessible.