The evolution of crypto exchanges — What’s next for the industry
From what started as something of a “technological experiment” with Bitcoin (BTC) over a decade ago, the crypto asset industry has become a significant driver for change in global financial markets. Cryptocurrency exchanges started as a means to enable crypto enthusiasts to trade digital coins outside the traditional financial system on a decentralized and largely autonomous basis.
It is likely that combined with regulatory recognition and development of digital market infrastructures, acceptance of essential Anti-Money Laundering practices, investment in security protection systems, and recognition of investor protection measures will see these businesses continue to expand and potentially merge or compete on an even footing with existing regulated marketplaces.
The success of these platforms in allowing an unregulated free-flow of value across borders has unsurprisingly resulted in interest from governments and regulatory bodies. Initial skepticism was replaced by concern over weaknesses in relation to AML, fraud and investor protection measures. As crypto exchanges have improved their systems to meet AML and investor protection requirements, there is a begrudging recognition that these platforms have brought much-needed modernization and democratization to a market that has generally been seen as remote and privileged.
Crypto exchanges have provided 24-hour, global access to trading venues with participants eligible from all walks of life and able to participate directly through accessing online trading tools and graphics, which have historically been available almost solely to a limited set of professional investors.
Crypto assets have generally been on the outer edge of the regulatory perimeter, but are increasingly facing pressure to be included within the regulatory framework.
The first key step in this direction at an international level was the extension of the AML standards announced in June 2019 for crypto-related businesses from the Financial Action Task Force, the global standard-setting body for fighting financial crime.
Related: Slow but steady: FATF review highlights crypto exchanges’ struggle to meet AML standards
In the European Union, this was followed by the adoption of the 5th Anti-Money Laundering Directive, or 5AMLD, which brought crypto-asset exchanges and custodian wallet providers into the scope of the EU AML regime. As a result, in-scope crypto asset firms operating in the EU and the United Kingdom are now subject to the full suite of AML obligations applicable to most financial market participants, such as the need to undertake customer due diligence checks when onboarding a new client. In addition, they are required to register with the relevant national competent authorities where they intend to carry on crypto-related business.
The general approach to the regulatory treatment of crypto assets has been more complicated. At an EU-wide level, the position so far has been to apply the existing regulatory framework to crypto assets that have the characteristics of regulated assets. Specific regulations such as outlawing the sale of crypto derivatives to retail investors are imposed, but more specific requirements are considered necessary.
Exchanges dealing in digital assets are therefore subject to regulation if the assets traded fall within this regulatory perimeter. To a large extent, this has meant understanding the application of the existing regulatory framework and applying this to relevant circumstances, relying on interpretative guidance where necessary.
As a result, two main categories of crypto assets, which function in a similar manner as regulated instruments, and their respective service providers have been brought within the scope of existing rules. These are digital assets akin to “financial instruments” (generally capturing crypto assets used as means for raising finance and derivatives), but are being treated with existing rules for tokens functioning as “electronic money.” This captures crypto assets designed to facilitate payment transactions or some stablecoins.
Importantly, this means that crypto exchanges trading digital securities, such as DLT-based shares, bonds, fund units or derivatives — often referred to as security tokens — are required to obtain authorization as regulated trading venues to do business in the EU. This would also capture EU-based crypto exchanges trading particularly popular instruments, such as derivatives referencing Bitcoin (BTC) or other cryptocurrencies as underlying assets. This has been supplemented by jurisdictions putting in place bespoke regimes for the crypto sector, for example, clarifying aspects concerning the use of the underlying DLT technology (e.g., Luxembourg) or closing gaps in existing rules (e.g., France).
In the securities space, significant steps are being made toward developing a credible digital market infrastructure for issuance, trading and settlement of digital securities. Most notably, the U.K. Financial Conduct Authority has recently granted a MiFID licence to Archax Limited, which has become the first fully-authorized trading venue for digital securities in the U.K.
At the same time, established exchanges are building their own “digital versions,” such as the Börse Stuttgart Digital Exchange in Germany and the SIX Digital Exchange in Switzerland. However, despite these developments, integrating digital solutions with existing market infrastructures remains challenging, not least due to constraints stemming from existing rules around settlement finality requirements in the post-trading systems.
In an effort to unlock opportunities for innovation in the space, the European Commission has recently published a proposal for a pilot regime for market infrastructures based on DLT, which aims to create a bespoke legal regime for the application of DLT in post-trade services and would allow for the creation of digital securities settlement systems.
Some of the largest crypto exchanges are looking to obtain regulatory licences across the world in order to be able to directly compete with incumbent financial institutions, adapt to user demand for more sophisticated services, and enhance their own credibility in the market.
For example, in March 2018, the U.S.-based cryptocurrency exchange Coinbase obtained an e-money licence from the U.K. FCA, as well as from the Central Bank of Ireland in 2019, allowing it to issue e-money and provide payment services, thereby enhancing its fiat-to-crypto services. Kraken has recently obtained a banking license from the State of Wyoming to create a special purpose depository institution (Kraken Financial), which will allow it to provide deposit-taking, custody and fiduciary services for digital assets.
With a view to enhancing market integrity and investor confidence, the EU Commission put out a proposal on Sept. 23 for a regulation on markets in crypto assets, or MiCA. The draft regulation captures crypto assets such as “asset-referenced tokens” (commonly known as “stablecoins”) as well as “utility tokens.”
Under the MiCA draft, crypto exchanges operating in the EU are required to obtain regulatory authorization and are subject to strict prudential and conduct requirements. In addition, the draft rules include prescriptive requirements around admission of crypto asset instruments to trading, including the requirement to publish a white paper with specified content.
European Commission proposals have to go through a long legislative process before they become binding law. The MiCA however, is likely to be a significant step toward establishing credibility and structure in creating a viable crypto asset industry in the EU, which will identify the contrasting regulatory framework for security-type crypto assets and non-security-type crypto assets. For many, the process of imposing regulatory requirements at all in the pure crypto assets sector will be an anathema that stifles innovation and creates barriers to entry for smaller fintech firms. However, this is the most likely approach to establishing a long-term, viable marketplace.
There is significant interest from large institutional players in entering the crypto asset space. Some of the biggest European institutions have extensive digital asset programs. As an example, ING is currently working with industry participants on a digital custody and safekeeping solution within the FCA sandbox that will provide institutional-grade security for digital holdings and transfers of digital assets. The U.S. Office of the Comptroller of the Currency recently gave the “all-clear” to U.S. banks to provide cryptocurrency custody services for their customers, a development that could put crypto asset service providers (including exchanges) in direct competition with traditional players.
Going forward, the innovation, democratization and expansion of access brought about by crypto exchanges, as well as an improved financial regulatory recognition of their services, will be combined with the digitalization of traditional asset securities and development of market infrastructure for digital trading. This is likely to lead to a powerful dynamic for combinations and mergers between rapidly developing crypto exchanges and incumbent institutions. We are currently at the forefront of advising on developments in the space and welcome the significant changes undoubtedly ahead.
This article was co-authored by Martin Bartlam and Marina Troullinou.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Martin Bartlam is partner and head of FinTech at DLA Piper.
Marina Troullinou is an associate at DLA Piper.
Ripple Executive Lists Obstacles Facing XRP As Price Trails Far Behind Bitcoin
As XRP continues to languish compared to Bitcoin, Ripple’s chief technology officer David Schwartz is engaging in frank discussions about the crypto asset’s challenges going forward.
Schwartz, one of the original architects of the XRP Ledger, responded to questions on Twitter about why banks are holding back in terms of implementing XRP-powered technology.
“I think there are a combination of obstacles. Regulatory uncertainty, last mile problems, fear of reprisals from existing partners, and so on.
Another big thing is that the very best customers are ones that are going to use bridge assets to build new products.
They’re heavily motivated to see projects to completion and will push the benefits all the way down to customers. But in that case, even when they’re 100% ready to go, they still have 0 customers because the product is new. So it’s slow to get momentum.”
JPMorgan officially launched its digital currency, JPM Coin, this week.
The asset will be used to power international payments, according to Takis Georgakopoulos, JPMorgan’s head of wholesale payments, which puts it in direct competition with XRP.
Schwartz, however, says on Twitter that such an asset will have limited use.
“JPM Coin will only be useful for people who trust JPM, are in a jurisdiction that’s compatible with JPM, and aren’t concerned about their sovereignty.
A system nobody can own and control is, IMO, better – especially if you compete with JPM, or hope to.”
Ripple utilizes XRP in its cross-border payments platform, On-Demand Liquidity (ODL). The company says ODL has powered $2 billion in volume since its launch in October of 2018.
Bitcoin Price Prediction: BTC/USD Consolidates Between $13,060 and $13,600, Poises for Upward Move Soon
Bitcoin (BTC) Price Prediction – October 30, 2020
For the past 24 hours, Bitcoin has been battling to break the resistance at $13,600. The bulls have retested the resistance zones thrice without breaking it. BTC/USD fluctuates between $13,060 and $13,600.
Resistance Levels: $13,000, $14,000, $15,000
Support Levels: $7,000, $6,000, $5,000
After an unsuccessful attempt to break the $13,800 resistance, the king coin has been confined to fluctuates between $13,060 and $13,600. For the past 48 hours, buyers have been repelled thrice at the $13,600 resistance. The coin will fall to the lower range after each resistance. Nevertheless, the consolidation between $13,060 and $13,600 will continue so that Bitcoin will have a strong breakout that will propel price to break the $13,600 resistance. In the same manner, the momentum will extend to break the resistance at $13,800.
Once the $13,800 resistance is breached, BTC will rally above the $14,000 high. On the upside, BTC must clear the $13,600 and $13,800 resistances to continue the upside momentum. For the past five days, the uptrend has been disrupted by the recent resistance levels. On the downside, if the bulls fail to break the $13,600 and $13,800 resistances, there will be a bearish reaction. The bears will take advantage to break the $13,060 support. This will trigger the price to drop to $12,900 and $12,000 low.
Wrapped Bitcoin (WBTC) Is Now Ethereum’s 6th Largest Token
Wrapped Bitcoin (WBTC) has a market capitalization of $1.58 billion. This figure makes up 80% of the total BTC held in Ethereum. It has also reached an all-time high in terms of market capitalization and the number of tokens. It is reported that WBTC is the most accepted version of Bitcoin for use on the Ethereum network. Currently, it has a record total of 116,885 WBTC, backed by an equal number of BTC held by custodians. Today, WBTC is the Ethereum sixth-largest token by market cap, after Crypto.com Coin (CRO), USD Coin (USDC), Chainlink (LINK), BNB (BNB), and at number one, Tether USD (USDT).
Meanwhile, from the price action, Bitcoin is likely to move up once the resistance is cleared. On October 29 uptrend, BTC was resisted. The retraced candle body tested the 38.2% Fibonacci retracement level. This retracement implies that BTC will rise and reach a high of 2.618 Fibonacci extension level which is $14,693.90 high.
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An overview of NFT marketplaces
Currently worth $100 million, the nonfungible tokens industry is changing how the ownership and authenticity of digital assets are perceived. Leading entities in the gaming and blockchain world are already experimenting with NFTs in all sorts of ways. However, the primary goal is to prove the authenticity and ownership of digital items, which had proven difficult until the advent of blockchain technology.
Through blockchain technology, digital assets can have unique identifiable attributes that make them rare and irreplaceable. On NFT marketplaces such as OpenSea, a multitude of projects are at work producing all sorts of creative and transferable NFT items.
While the past decade has seen a lot of excitement around fungible digital assets like Bitcoin (BTC) and Ether (ETH), nonfungible tokens are just getting started, and already, there is a lot of progress to write home about.
While a fungible token like Bitcoin is indistinguishable from and replaceable with other tokens of its kind, a nonfungible token is distinguishable from other tokens and cannot be replaced or substituted.
A bank note in a wallet, for instance, can easily be lent out and replaced with another one. The person that takes the loan does not necessarily have to give back the same bank note. That banknote is, therefore, a fungible item replaceable by another of its kind in a one-to-one ratio.
However, when buying a unique piece of art or a plane ticket, it is impossible to get the same value if the item is exchanged for another — assuming those items are unique. Therefore, a plane ticket that gives you the right to a seat in standard class on a flight to location A is not the same as a ticket that lets you board a private jet to location B.
Blockchain makes it possible to own NFTs in the digital world, similar to how anyone would own a baseball card in the physical world. These digital assets can be stored on the blockchain and be transferred from one owner to another without the risk of unlawful capture and duplication. Tyler Perkins, vice president of marketing at Immutable — a blockchain-based game development company — told Cointelegraph:
“The use cases for NFT are incredibly powerful. Whether it be providing non-custodial ownership of video game items and domain names, creating digital scarce art, or tracing commodities — they lend themselves well to various high-value use cases in a digitally native world.”
However, it would be hard to discover NFTs without a marketplace. Perkins mentioned that “Marketplaces serve an important role in the discovery and growth of NFTs,” adding: “The ability to trade a digitally scarce, unique asset is one of the primary selling points of the technology, so naturally, marketplaces support that.” With that said, below is a rundown of some popular NFT marketplaces.
OpenSea is touted as the world’s largest marketplace for NFTs. With transaction volumes that exceed many of its peers, OpenSea offers a variety of virtual items ranging from digital collectibles to domain names, digital art, card games and so forth.
Simply put, the platform operates as a one-stop shop for all nonfungible tokens. Users can also customize their NFTs and sell them to a target audience on the marketplace. Currently, OpenSea hosts more than 1.2 million NFTs and features tools that enable developers to create and integrate NFTs into games with minimum effort.
According to the company’s CEO, Devin Finzer, the future of the NFT industry will see a lot more activity in the purely digital gaming world before the tokenization of real-world assets picks up speed.
On June 8, PlayDapp was launched as a customer-to-customer NFT marketplace that allows users across the globe to freely trade blockchain in-game items. Currently, users on the platform can trade in-game items from CryptoDozer and DozerBird, which are the only blockchain games supported on the marketplace. Plans are underway to launch titles such as Along with the Gods: Knights of the Dawn.
Apart from being a platform for gamers looking to trade NFTs, PlayDapp also offers support for developers. According to Choi Sungwone, the platform’s general manager of strategy, the company plans to deliver tools that “allow game items in the RPG genre to be traded through NFT through PlayDapp MarketPLAce.”
PlayDapp is focusing on creating in-game items that can be traded among users and is supported by the involvement of industry experts such as Koh Kwang-wook, who is the former chief technology officer of Item Bay, the world’s first online game item website.
Also, about a year ago, SuperTree, the company backing the PlayDapp marketplace, joined Samsung’s C-Lab program, which is a startup incubation program supporting the development of promising startups.
Game, the company that owns Game Credits, wants to be the in-game currency of the esports industry. At its core, the Game Credits platform uses its GameCredits (GAME) token for multiple purposes. First, the token serves as an in-game currency that can be used to buy and sell NFTs on the marketplace.
GAME tokenholders can also stake tokens to fund the development of quality games on the platform. The token is used to pay for transactions on the NFT marketplace and also to pay for fees associated with the creation of NFTs by developers.
Apart from being a marketplace for in-game items, Game Credits also offers solutions for the ownership and creation of digital assets by providing developers with ready-made tools that enable quick integration of NFTs into gaming platforms.
With Game Credits, developers can earn from the NFTs they create, even without any knowledge of blockchain programming. Jason Cassidy, CEO of Game Credits, told Cointelegraph that NFT exchanges are an essential part of the ecosystem: “NFT’s represent the other half of crypto — the parts of our world that are unique and hold value to us for completely different reasons.”
Founded in 2015, Decentraland is a decentralized, user-owned virtual world that features an NFT marketplace where users can buy plots of land, develop them and sell them later. The platform also allows users to create original artwork and scenes using simple building tools. Apart from buying and selling virtual land, Decentraland’s NFT marketplace also offers wearable avatars, among other NFT items built on the Ethereum blockchain.
Every virtual item on the platform is represented with a token recorded on a blockchain-backed ledger. For example, virtual land is represented by a token called LAND, and those who own such tokens can build up other tokens that represent other items such as a house, hotel or school on top of the virtual land.
Although the platform is still undergoing development, Decentraland, at its core, is looking to create a new way to interact with NFTs by creating an immersive experience tied to a native economic network.
The Enjin marketplace was one of the first NFT marketplaces to go online. Enjin, a blockchain asset issuance platform, allows developers to use its Enjin Coin (ENJ) to develop NFTs. Enjin Coin is built on Ethereum with a refined NFT standard that includes the Enjin suite, allowing for the creation and monetization of digital games.
So far, Enjin has partnered with other players in the industry to create tools such as the EnjinCraft plugin, which is an open-source plugin that enables the use of tokenized NFTs in Minecraft. Therefore, players can link Enjin wallets to purchase in-game weapons and avatars or trade them with other items within Minecraft.
Having secured partnerships with Ubisoft, Microsoft and Samsung — to mention only a few — the Enjin team has gained popularity in the Ethereum world and plans to grow its platform while continuing to enable the secure ownership and trade of NFTs.
According to Dapp Radar, Rarible is one of the leading marketplaces for NFTs, with weekly volumes that exceed $1 million. Yet, the Russia-based platform was founded just in 2020.
Rarible is a community-owned platform that offers a variety of digital assets, ranging from digital artwork and domain names to different kinds of collectibles. Apart from its capacity to allow gamers to trade NFTs, users on the platform can use the Rarible Governance Token (RARI) to create customized NFTs. This feature allows artists to create music albums, movies and even books whose ownership is secured on the blockchain.
The Rarible token is also used as a governance token, thus further shifting the Rarible marketplace into a decentralized autonomous organization.
Rarible recently partnered with CoinFund, a New York-based blockchain investment firm, through which Rarible is expected to receive funding for the further development of its NFT marketplace.
At the moment, there is a consensus in the crypto community regarding the value of fungible digital assets such as Bitcoin and Ether, which is determined by market forces. However, nonfungible assets are valued for totally different reasons and are increasingly becoming the other half of the blockchain discussion.
With reports indicating a growth of over 2.5 billion users, Cassidy believes that future growth is predicated on the usability of NFT exchanges: “Hot NFT sectors like art need these marketplaces to allow price discovery to take form as their value is purely subjective in nature. The exchanges offer this foundation for awareness of a new asset class as well as direct access for investment into it.”
The future looks bright for the NFT landscape as organizations such as the Blockchain Game Alliance attempt to bring together NFT-focused minds to further develop the industry. However, there are still a few challenges on the way. For instance, Cassidy noted that the lack of liquidity makes it risky to invest in certain NFTs, as the market is still in its early stages with a limited number of buyers. Also, because the value of the assets is considered subjective, an investor may have to wait for a while to get the price they want.
In addition, because most of the NFTs are built on Ethereum, Cassidy added that “The more Ethereum struggles to scale the more challenges the NFT industry will have as the ERC-721 and ERC-1155 standards currently represent the bulk of all NFT’s in existence today.”
Perkins also noted scalability as the main issue hindering further growth of the industry. However, he opined that scalability might not be an issue for long given the efforts from multiple projects to develop scalable layer-two solutions that hope to improve the handling of off-chain transactions by decentralized applications. As such, layer-two solutions will reduce the cost of moving NFTs from one user to another while also increasing the overall efficiency of Ethereum-based platforms.
Crypto ‘fear index’ can now be used to peek into the future
The Crypto Volatility Index, or CVX, is now live as a beta test and proof of concept. The index tracks the implied volatility of crypto options in a similar fashion to the VIX index used in stock markets.
The VIX is usually referred to as the “stock market fear index” as it often spikes in anticipation of major downward moves.
The CVX operates under a very similar mechanism. It tracks the implied volatility of a basket of crypto options, primarily for Bitcoin (BTC) and Ethereum (ETH).
Options are a derivative product that give buyers the option, but not the obligation, to purchase or sell an asset at a certain strike price and at a certain date in the future. To be able to do this, they pay sellers a premium, which generally depends on factors such as time until expiry and the overall expectations of future volatility, called implied volatility.
Implied volatility refers to how much traders think a certain asset will move either higher or lower, and it differs from realized volatility, which is how much the asset actually moved. Due to this, it can be considered as a leading indicator of large price movements, though options traders may not always be correct about their predictions.
The volatility index aggregates these predictions of the future across a variety of option premiums to provide a generalized overview of the market.
The CVX could also be traded, allowing investors to hedge their bets by betting on volatility to go higher or lower. The team said that it works in a very similar way to the VIX, using the Black-Scholes formula to calculate implied volatility from option premiums.
The CVX is a DeFi product that features its own governance token under the same name. The protocol will initially support volatility trading with ETH and USDT, while the CVX token holders will be able to make some of the decisions about the future of the platform.
Nevertheless, the current beta version relies on centralized options platforms like Deribit. In the future, DeFi protocols for trading options are expected to be included as well.
The index currently includes data for just over a month, but it highlights moments of elevated fear such as the OKEx withdrawal issues, which triggered a CVX all-time high around Oct. 21.
Overall, the crypto market appears to be in a state of elevated fear as of late October, though it is difficult to judge the significance of these values without a longer track record.
As the index matures, it may become an important staple in a trader’s arsenal to see what the market is predicting for future price action.
Crypto derivatives platforms remain somewhat underdeveloped though, and implied volatility figures seen now may not always make sense when analyzed by veteran traders.