The World Federation of Exchanges (WFE), the global body for exchanges and central counterparty clearing houses (CCPs)s, has set out six principles to promote sound marketplaces in crypto-trading in a new report, entitled “Promoting Sound Marketplaces – DeFi/CeFi, Crypto Platforms & Exchanges” .
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.
The WFE recommends that governments and regulators require CTPs to meet the high standards that all market participants expect and deserve. The recommendations are:
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, says: “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, says: “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.”
