Luna collapse highlights crypto exchanges’ role as gatekeepers


The collapse of $ 40 billion last week in the popular cryptocurrency token Luna underscores the crucial role that exchanges play as guards in determining what digital assets are available to major traders.

Fierce competition between stock exchanges has led to a sharp increase in the number of tokens available on popular platforms among the investors on display.

But the risks of listing new tokens – and the lack of regulation around these assets – were highlighted last week when terraUSD, a currency that promised to match the value of the US dollar, was left worthless, eliminating the value of its sister token as well. . Luna, in what the research firm CryptoCompare called “the greatest destruction of wealth in this period of time in a single project in the history of crypto.”

Their collapses have focused attention on the standards applied by exchanges when they decide to list a currency. Unlike the stock market, regulators play little or no role in overseeing the issuance and trading of tokens in most jurisdictions.

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“I think the whole industry needs to set a high bar when it comes to assessing whether they list or invest in stable currencies that are backed by things like algorithms,” said Lennix Lai, director of financial markets at OKX, a cryptocurrency exchange.

Major exchanges, including Coinbase, Binance, OKX and Crypto.com, which previously allowed their customers to buy Earth or linked tokens, stopped trading during the crisis.

The first destination for many novice cryptographic investors is major stock exchanges such as Binance and Coinbase, which say they check tokens before they are available to their millions of users.

“It’s true that we’ve listed more and more assets than ever before,” Paul Grewal, Coinbase’s chief legal officer, said in an interview in April. “At the same time, there are many, many more assets available for your consideration and presented for your consideration than ever before.”

Graph of $ lines per coin showing the Moon falling back to Earth

Grewal said Coinbase rejected “many, many more assets” than it approved. In March, it added 24 new trading assets out of the 160 that applied for their consideration, he said.

In total, Coinbase included 164 currencies in April, compared to July 28, 2020, according to the latest CryptoCompare data. FTX, Bitfinex and Binance offshore exchanges list more, but their currency stable has grown more slowly.

Traders ’enthusiasm for accessing the latest popular token puts pressure on exchanges to list more assets. Exchange decisions also have a huge influence on which tokens gain traction. New listings on Coinbase tend to increase in price as more merchants access tokens, a pattern that some analysts have called the “Coinbase effect.”

“Suddenly, there’s a massive influx of liquidity when you list a token in an exchange like Coinbase,” said Roberto Talamas, a researcher at cryptocurrency data company Messari.

FTX CEO Sam Bankman-Fried said only 50 cryptocurrencies appear to have real value. But most exchanges, including FTX, list several hundred assets.

Most jurisdictions have little or no legal standard on which cryptocurrencies can be publicly listed so that ordinary people can trade, so exchanges play a key role in controlling currencies. “If you were in a world that was regulated, you would be responsible for the products that you put in your exchange,” said a senior executive of a large European cryptographic group.

Volume column chart (bn $) showing trading volume in smaller tokens crashes in Coinbase

James Kaufmann, a partner at law firm Howard Kennedy, said the regulation provides stock exchanges with a clear set of listing criteria to meet, while crypto markets operate based on “buyer’s care.”

“The clue is in the name, isn’t it: is it a cryptocurrency or a stock exchange?” he said.

Binance CEO Changpeng Zhao said he would like regulators to provide guidelines on token lists. But so far the world’s largest exchange relied on the “intelligence of the crowd” to decide which currencies to list, he said in an interview in March.

“Often the crowd is a better judge than ourselves,” Zhao said, adding that the number of users of a currency is the most important criterion in determining whether Binance will list it. In a blog post about his listing scheme, Binance said he also subjected tokens to “rigorous due diligence.”

Gemini, the stock exchange owned by Winklevoss twin billionaires, said it aimed to list the digital assets demanded by customers, but also tries to protect its customers from dangerous tokens.

“If we think there’s a real threat to our customers’ funds being at risk, then we wouldn’t move forward, ”said Brian Kim Johnson, CEO of Gemini’s Crypto Core team.

Scrutiny on the standards that exchanges apply when they decide to list a currency occurs when the strategy of adding more currencies to drive growth shows signs of hesitation.

Buying and selling smaller tokens helped increase Coinbase’s trading volume by seven times last year. However, trading on what the exchange calls “another cryptocurrency” fell more than half in the first quarter, from more than $ 370 million in the last three months of last year, according to Financial Times calculations. The category includes chips other than bitcoin and ether, which have not suffered equally large declines in trading.

Coinbase CEO Brian Armstrong said last month that the platform planned to create a system for users to rate and review new digital assets, similar to product reviews on Airbnb or Amazon. Coinbase thinks the system can “help create additional protections for consumers in crypto,” he said.

Additional report by Scott Chipolina

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