How Regulations Will Form Crypto Exchanges in the Future

Ceras Ventures
5 min readNov 30, 2023

The recent shifts in the cryptocurrency landscape, such as the step down of Changpeng “CZ” Zhao, CEO of Binance, give us an insight into the future of cryptocurrency and crypto exchanges.

The Trial of SBF

Sam Bankman-Fried (SBF), founder of the crypto exchange FTX, was found guilty of seven counts of fraud and conspiracy on November 2, 2023. The charges included stealing billions of dollars from customers’ accounts, defrauding leaders, and money laundering.

FTX’s downfall, while occurring within the crypto landscape, mirrors classic financial deceit prevalent in traditional finance, emphasizing the broader issue rather than inherent flaws of cryptocurrencies.

The trial’s significance lies in reminding the community about the fundamental tenets of cryptocurrency: the importance of self-custody advocated by industry leaders like Coinbase and Kraken. Entrusting assets to centralized entities contradicts the ethos of empowerment and freedom inherent in cryptocurrencies.

There’s a call to revisit the wisdom of cypherpunks and modern-day visionaries, emphasizing the need to transcend superficial aspects of the crypto world and focus on understanding security measures like hardware wallets. It stresses the necessity of aligning involvement in the crypto space with the foundational principles, not succumbing to the allure of price fluctuations or charismatic figures.

Ultimately, the trial urges a return to and embrace of the core values — self-custody and decentralization — to ensure the realization of the revolutionary potential of cryptocurrency, emancipated from the shadows of financial deceit.

The Allegations against Kraken

SBF was not the only one in trouble. On November 21, the US Securities and Exchange Commission (SEC) accused Payward and Payward Ventures, parent companies of the crypto exchange Kraken, of operating an unregistered exchange. The SEC claimed that, since at least 2018, Kraken had been unlawfully facilitating the buying and selling of crypto asset securities.

The recent legal action taken by the U.S. Securities and Exchange Commission (SEC) against Kraken marks another significant move in the SEC’s ongoing crackdown on the cryptocurrency industry. Allegations include operating an unregistered securities exchange and mingling customer funds with the exchange’s own assets, raising concerns about compliance and investor protection.

The SEC has consistently maintained the perspective that numerous cryptocurrency tokens are securities, necessitating crypto exchanges to register accordingly. The lawsuit filed against Kraken in a California district court focuses on specific cryptocurrencies deemed as securities by the SEC, accusing the exchange of offering them for sale without proper registration.

Notably, this isn’t the first regulatory challenge for Kraken this year. The exchange settled earlier for $30 million in connection to charges regarding its staking-as-a-service offering, reflecting the growing scrutiny faced by major players in the crypto space.

One of the serious accusations against Kraken involves the mingling of customer funds with the exchange’s own, creating potential risks for customers. The SEC’s filing highlights instances where Kraken allegedly held customer crypto assets alongside its own, leading to identified risks of loss. Moreover, allegations regarding operational expenses being paid directly from accounts holding customer cash further compound the regulatory concerns. Similar issues of mingling user funds were faced by other entities in the industry, such as FTX, adding weight to the SEC’s claims.

Gurbir S. Grewal, director of the SEC’s Division of Enforcement, emphasizes that the alleged decisions made by Kraken put investors’ funds at risk and were driven by prioritizing financial gains over compliance with securities laws.

In response, Kraken has publicly disagreed with the SEC’s position, stating that there isn’t a legal basis supporting the agency’s stance on digital asset trading platforms needing to register.

This legal confrontation between Kraken and the SEC underscores the regulatory friction within the cryptocurrency sphere, highlighting the clash between industry practices and regulatory compliance. It accentuates the growing need for clearer regulatory frameworks to address the complexities arising in the intersection of cryptocurrency trading and traditional securities laws.

Binance Settlement

Binance, the largest crypto exchange platform in the world, has grown at an unprecedented pace for the past few years and occupied nearly 60% of the market share. However, its success came with a price as they were blind to money flowing to illicit parties through their platform. On November 21, CZ Zhao stepped down as the CEO of Binance and pleaded guilty to the money laundering charge brought by the Department of Justice (DOJ). His $4.3 billion settlement with US authorities underscores the increasing scrutiny faced by exchange platforms.

The agreement between Binance and the government stipulates the retention of an ‘independent compliance monitor’ for a three-year period. This individual, compensated by Binance but operating under the auspices of the US government, possesses broad-ranging powers to conduct a comprehensive inquiry into the company’s adherence to regulatory standards. This measure is perceived diversely within the industry: some interpret it as a proactive step to guarantee Binance’s compliance in the aftermath of legal proceedings, whereas others harbor doubts regarding its efficacy in ensuring lasting adherence to regulatory frameworks.

A Turning Point

The three cases and the allegations serve as a wake-up call for the entire industry, reminding all the other exchange platforms to adhere to the regulations. The cases have caused panic in the crypto industry and highlight the necessity for exchanges to actively monitor and report suspicious transactions to strictly avoid the act of money laundering and any illegal actions.

The crypto exchange industry reaches a turning point when the regulatory agencies step in. The exchange platforms now need to prioritize compliance, transparency, and accountability instead of profit and cash flow to secure their position in the market. The collapse of FTX and CZ Zhao has already demonstrated the consequences of not doing so. This shift may foster a crypto market that operates in ways similar to a traditional financial market.

Industry Consolidation

With the increased regulatory scrutiny, the industry may witness a period of consolidation. The exchange platforms that prioritize regulatory compliance and adopt security measures may gain prominence. The ones who fail to do so may be eliminated by either the industry trend or the regulatory agencies.

Maturation & Expansion of Crypto market

The increased regulations may sound discouraging to the exchange platforms since they need to spend time and money consolidating their platforms to align with the regulations. However, this may also help the industry to grow and become more mature. The previous industry model–lack of regulations and scrutiny–makes investors and financial institutions hesitate to enter the crypto space. Now, they might find the evolving regulatory landscape more conducive to their participation. This influx of capital could contribute to market expansion and long-term stability by potentially mitigating the extreme volatility that has long been associated with cryptocurrencies.

Innovation in Compliance Technology

Crypto exchange platforms may invest in compliance technology to keep up with the growing emphasis on regulations. They may invest in advanced monitoring systems, artificial intelligence, and blockchain analytics to ensure real-time tracking of transactions meets the regulatory requirements. The innovations may redefine industry standards and set new benchmarks for security and transparency.

Conclusion

The crypto industry is now in a transformative era, marked by the trial of SBF and the allegations against CZ Zhao. With the tightening regulatory environment, the industry is poised for a more mature and transparent system that demands not only technological prowess but also commitment to principles that align with the broader financial landscape.

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Ceras Ventures

Ceras Ventures is a leading global crypto and blockchain investment firm investing capital on behalf of traditional funds, institutions and individuals