Global: WFE’s Head of Regulatory Affairs Highlights Risks Associated with Unregulated Crypto-Trading Platforms

Richard Metcalfe, the Head of Regulatory Affairs at the World Federation of Exchanges (WFE), emphasized the importance of clear terminology and outlined six key recommendations for regulators and cryptocurrency trading platforms (CTPs).

The WFE unveiled these recommendations earlier this week, which are as follows:

1. Segregate Market Infrastructure Functions: When appropriate, CTPs should segregate market infrastructure functions, such as limiting CTPs from trading their own books or engaging in activities that could pose conflicts of interest with their customers.
2. Operate Orderly Markets: CTPs should establish systems and controls to address broader risks, including abusive trading practices, to safeguard the integrity of price formation.
3. Maintain Adequate Financial Resources: CTPs should maintain sufficient financial resources to handle expected operational stress events effectively.
4. Facilitate Compliance with Best Execution Requirements: CTPs should promote compliance with best execution requirements to ensure fair treatment of traders.
5. Enhance Listing Standards: Robust listing standards should be in place to improve the quality and reliability of cryptocurrencies listed on CTPs.
6. Implement Appropriate Governance and Management Requirements: CTPs should adhere to appropriate governance and management standards to foster transparency and accountability.

Metcalfe explained that the term “exchange” in the context of cryptocurrencies can be misleading if certain key functions and safeguards are not in place. He raised concerns about the assumption by many cryptocurrency participants that the same checks and balances present in regulated markets for traditional financial assets automatically apply to cryptocurrency trading platforms.

The WFE recently published research on cryptocurrencies, highlighting the risks associated with unregulated crypto-trading platforms. Metcalfe pointed out that these platforms often engage in activities that would not be permitted or would be subject to strict regulation in established public markets.

Metcalfe acknowledged that some financial centers initially explored the potential benefits of a new strand of markets and technological development associated with cryptocurrencies. However, he noted that there is now a shift in perspective, with a recognition of the importance of addressing risks and ensuring investor protection.

Metcalfe clarified that the WFE’s recommendations are not aimed at opposing cryptocurrencies but are intended to promote public policy considerations that prioritize investor protection and market integrity. The WFE hopes that these recommendations will be taken into account by regulators worldwide. Metcalfe also mentioned that the WFE will respond to consultations on decentralized finance (DeFi) and digital assets organized by the International Organization of Securities Commissions (IOSCO).