What would you do if you tried to log in to your bank account only to discover your funds had been frozen? This scenario is many people’s worst nightmare.
Unfortunately, many crypto users have experienced something eerily similar.
In the last few years, several major crypto exchanges have become insolvent, causing users to lose their balances. Other exchanges have been forced to freeze users’ funds to prevent a collapse. What started as a couple of isolated incidents has turned into a worrying trend.
Government regulations – or rather the absence of them – tend to have played a role here. Left largely unregulated, many exchanges have operated according to very risky models, leading to severe liquidity problems. On the other side of the coin, some exchanges have had to close or suspend operations because a financial regulator of one of the jurisdictions in which they were based deemed that they weren’t acting in compliance with government regulations.
Fortunately, there are crypto exchanges that proactively seek to work with regulators and implement sound approaches to risk and liquidity. One of these exchanges is Gate.io. With more than 12 million users globally, Gate.io Group has become one of the largest crypto exchanges and built its reputation by adopting a pro-regulatory strategy that has involved obtaining licenses in Hong Kong, Malta, Dubai and Lithuania within the past year.
According to its EVP, Tom Yang, there are five things that crypto users need to understand about the regulation of exchanges.
1. Why is regulation important from a regulator’s perspective?
According to Tom, “The era when financial regulators let the crypto space manage itself are long gone. They have become aware of how criminal groups have been using crypto to finance illegal activities and move the proceeds of crime around the globe. And the financial scale of crypto institutions is now so large that malpractice or negligence by them can cause financial losses measured in the billions and have devastating consequences for ordinary people as well as the wider economy. Regulators’ arguments for regulating crypto are therefore more or less the same as their arguments for regulating traditional banks.”
2. Why is it important for exchanges to obtain regulatory approval?
“In one word, sustainability,” says Tom.
“An exchange that is flouting applicable regulations is not operating sustainably, because it could be shut down or sanctioned in some other way by the regulator at any moment. The most stable exchanges not only obtain a license to operate but also allocate resources to setting up infrastructure – above all, a compliance team based in the jurisdiction – that allows them to remain in line with evolving regulations. These are exactly the steps that we at Gate.io have taken.”
3. Why should users and investors care about whether their exchange complies with regulations?
“In demonstrating that it operates in compliance with government regulations designed to ensure solvency and sound financial management,” Tom says, “an exchange is proving to the world that it has taken the ultimate step in keeping its users’ assets safe and protecting them from financial misconduct.
“If users prioritize compliance status, over promised returns alone, when they pick their exchanges, they are therefore placing their investments with an institution that they can be sure will remain solvent.
“Moreover, given that financial regulations cover important areas that are not purely financial – protection of personal data, for example – by choosing a regulated exchange, users are also benefiting from a more generic but equally important level of consumer protection.”
4. What does an exchange that truly embraces regulatory compliance look like?
Tom observes that, “At Gate.io, we work toward achieving regulatory approval in every jurisdiction where we offer services. We have been issued licenses to operate by regulators in Hong Kong, Malta, Dubai and Lithuania. In jurisdictions where the regulatory regime is still being defined and firms operate in a guidance framework – for instance, Turkey, Brazil and Vietnam – we have invested heavily in setting up teams on the ground to work with the local authorities. The firm won’t announce that it operates in a jurisdiction until it has set up a local team there and achieved compliance with local regulations.
“Investors should check whether the exchange that they’re planning to work with takes steps like these, because if it doesn’t, it is probably operating in a much riskier manner.”
5. How can I find a secure and compliant exchange to trade on?
Tom has several suggestions for crypto users here.
“The first is to research your jurisdiction’s regulatory environment for crypto, checking in particular whether or not crypto exchanges are subject to local regulations,” he comments. “If they are, trade on platforms that have obtained regulatory approval, consulting the regulator’s statements on approved exchanges rather than the exchanges’ own claims.
“If you live in a jurisdiction that does not regulate crypto trading, ascertain which exchanges operating there have established a local office. One reason why this is important is that jurisdictions are generally moving to set up regulatory regimes, and exchanges that have a local presence there are most likely best positioned to seek regulatory approval at the moment when a regime goes into effect.
“The fact that an exchange is in a regulated market doesn’t in itself guarantee that it is safe to use. To understand potential reliability and risk issues, users should examine the other key components that allow an exchange to function smoothly. Exchanges should be compared across all of the following: assurances on trading protections, cybersecurity best practices, proof of reserves and asset liability protections. Reliable exchanges like Gate.io will have robust and transparent policies to deal with all of these areas, therefore providing additional assurances to users that their assets will not be made vulnerable by mismanagement on the exchange side. At Gate.io, for example, we offer 100 percent proof of reserves for cryptocurrencies that are traded on our platform.”
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