Improving Crypto Trading: Regulated Exchanges Recommend Six Principles to Build Trust and Stability
The World Federation of Exchanges publishes report “Promoting Sound Marketplaces – DeFi/CeFi, Crypto Platforms & Exchanges”.
London, 28 September 2023 – The World Federation of Exchanges (WFE), the global body for exchanges and central counterparty clearing houses (CCPs), today sets out six principles to promote sound marketplaces in crypto-trading in a new report.
The report, drawing on the collective experience of regulated market infrastructures as trusted guardians of public markets, makes six recommendations in light of issues that continue to affect the nascent crypto-currency industry which has suffered several high-profile controversies and collapses.
By applying regulatory principles that have been proven via established, trusted market infrastructures, governments and regulators can aid the crypto-trading sector to grow whilst protecting investors and ensuring orderly, fair and transparent markets.
The WFE’s analysis also found that whilst Decentralised Finance might bring innovation to financial products, crypto-trading platforms (CTPs) are frequently not as decentralised as they first appear, which presents some risks.
- 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.
In the short term, the WFE recommends that CTPs disclose their regulatory status and do not describe themselves as exchanges until they are appropriately regulated and adhere to the standards listed above. All regulated market infrastructure providers adhere to the standards above.
Nandini Sukumar, Chief Executive Officer at the WFE, said: “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. 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. Observing the standards will not only safeguard markets, it will enable the sector to grow.”
Richard Metcalfe, Head of Regulatory Affairs at the WFE, said: “Governments and regulators helped to shape the ethos of the current market infrastructure so that it operates in the trusted manner it currently does. The same logic must apply to CTPs, whether centralised or not, to prevent the significant risks and realities we have seen that can, and do, harm investor trust.”
The full paper can be read here.
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About the World Federation of Exchanges (WFE):
Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents over 250 market infrastructure providers, including standalone CCPs that are not part of exchange groups. Of our members, 34% are in Asia-Pacific, 45% in EMEA and 21% in the Americas. WFE’s 90 member CCPs and clearing services collectively ensure that risk takers post some $1.3 trillion (equivalent) of resources to back their positions, in the form of initial margin and default fund requirements. WFE exchanges, together with other exchanges feeding into our database, are home to over 50,000 listed companies, and the market capitalisation of these entities is over $100 trillion; around $140 trillion (EOB) in trading annually passes through WFE members (at end 2022).
The WFE is the definitive source for exchange-traded statistics and publishes over 350 market data indicators. Its free statistics database stretches back more than 40 years and provides information and insight into developments on global exchanges. The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities’ goals of ensuring the safety and soundness of the global financial system.
With extensive experience of developing and enforcing high standards of conduct, the WFE and its members support an orderly, secure, fair and transparent environment for investors; for companies that raise capital; and for all who deal with financial risk. We seek outcomes that maximise the common good, consumer confidence and economic growth. And we engage with policy makers and regulators in an open, collaborative way, reflecting the central, public role that exchanges and CCPs play in a globally integrated financial system.