Crypto-asset exchanges, which include cryptocurrency exchanges and are also referred to as digital asset trading platforms are market structures where digital asset buying and selling can occur. Some industry observers perceive digital asset trading platforms as similar to securities exchanges in functionality. However, they are generally not subject to the same regulatory regime, leading to policy debates regarding market integrity, investor protection, and the need to foster financial innovation.
Trading Platforms as Money Transmitters
Many crypto-asset exchanges are registered as money transmitters, a money service business licensed at the state level. Money transmitters are subject to registration and reporting requirements from the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department responsible for implementing the Bank Secrecy Act (P.L. 91-508). For example, money transmitters verify customer identity and record beneficiary information for $3,000 or more transfers. They are required to file “Suspicious Activity Reports” for certain transactions exceeding $2,000. In 2013, FinCEN
issued interpretative guidance for crypto-asset exchanges, stating that an “administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulation.”
Trading Platforms as Securities Exchanges
Because money transmitter regulation is focused mainly on state licensing, some argue that this framework is insufficient for large-scale interstate and international digital asset trading activities. For some observers, regulating crypto-asset exchanges as money transmitters raises investor-protection concerns. Although some view them as functional equivalents to stock exchanges, they are not subject to the same type of investor protection regulation as those exchanges.
Crypto-asset exchanges could be subject to regulation from securities and commodities regulators. Under the Commodity Exchange Act (P.L. 74-675), the Commodity Futures Trading Commission (CFTC) regulates derivatives exchanges (for example, CFTC has the authority to bring enforcement actions for fraud and market manipulation involving digital asset commodities spot and forward transactions. However, observers point out that the CFTC does not otherwise regulate these markets or market participants.
In addition, the SEC issued a statement clarifying that the online platforms for buying and selling crypto assets that qualify as securities could be unlawful. The SEC took its first enforcement action against an unregistered crypto-asset exchange in 2018.
Crypto-Asset Exchanges Versus National Securities
The differences between crypto-asset exchange investor protections under current regulation and what they would be if most were regulated by the SEC as national securities exchanges could include requirements to increase transparency, fairness, and efficiency. These are guiding principles in national securities exchange regulation, yet some perceive them as lacking in crypto-asset exchanges’ current practices. The downsides of heightened regulation may include increased compliance costs, hindrance of
financial innovation, and competitive pressure for resources and talent internationally.
Nontransparent, Fraudulent, and Manipulative Activities
Many crypto-asset exchanges (including those that generally have low trading of digital assets that are not securities and thus not regulated by the SEC) are reportedly exaggerating their volumes to attract more participation. Many investors may not know whether the trading volume and prices reflect actual activities or market manipulation. One study showed that 95% of Bitcoin’s trading volume displayed on digital asset price and volume aggregator
CoinMarketCap.com is either fake or non-economic. Another academic study illustrated the large scale of the potential damage that digital asset market manipulations could create, underlining investor-protection concerns.
One observer stated that “when you go into one of these exchanges, you don’t know whether the order book is accurately reporting the bids and the offers. You don’t real y know if there is front-running. You don’t know whether some of the tradings that are reported is real or fake.”
Network Congestions and Market Inefficiencies
Unlike SEC-regulated exchanges, crypto-asset exchanges frequently face network congestions or trading halts, leading some to question the readiness of these exchanges to serve a growing marketplace.
For example, during a rapid digital asset sell-off and recovery in May 2021, multiple major crypto-asset exchanges reportedly encountered technical issues, further intensifying market stress during a volatile time of increased trading. These market disruptions could generate investor protection concerns due to investors’ inability to promptly get in and out of their investment positions or investors’ failure to seek the best execution for their trades—standard features of a fair and efficient trading system.
Many observers have called for changes to the regulatory framework governing crypto-asset exchanges.
Some have questioned whether digital asset trading warrants more regulatory safeguards. SEC Chair Gary Gensler has asked Congress to provide more clarity regarding authority over crypto-asset exchanges.