Exchanges have seen substantial growth in 2017 and early 2018 with trading volume records literally being set every month. Then — aside from the bear market — came the plague of scandals, hacks, fraud and wash-trading that even led to the temporary suspension of some of these exchanges.
User confidence clearly isn’t as high as it was prior to these waves of attacks.
Around $1b USD was stolen during exchange hacks this year alone. It’s not just about the money, there’s also a lot of reputational damage. However, new exchanges are still being built everyday and we’ve seen many of them create investment arms and even business incubators.
Let’s break down the types of exchanges that are most common now, as described by our #bbbkk2018 speaker Alex Shin from HASHED.
- Regulated fiat on-ramp
Many players are solely focused on this market
- ‘The Coinbase Approach’
Building trusted institutions, targeting a whole different group
- ‘The Crypto-crypto Exchanges’
Playing the jurisdiction catch-me-if-you-can game
- Decentralized Exchanges (DEX)
But how ‘truly’ decentralized are they?
And aside from all that, there’s OTC; the OTC market volume is estimated around 2–3 times the size of what’s traded at exchanges.
Why OTC Is A Better Alternative For Large Trades
Trades made on the OTC-market — most importantly — don’t affect the price. Exchanges often don’t have the liquidity to meet the demand, and usually have maximum trading and withdrawal limits as well.
Even though there might be fees involved, you’ll still get a better price in the end, avoiding the slippage that would have occurred doing the same trade on exchanges. On top of that, exchanges have proved themselves vulnerable over time and when you’re talking about such huge sums of money, most people would avoid having that on an exchange.
And just from a practical standpoint, dealing with a person instead of an order book is an advantage in itself; OTC trading desks usually have personalized service, 24/7. When something doesn’t go as planned, you don’t want to file a support ticket and wait — potentially — months.
— OTC is also a very viable option for ICOs looking to convert their crypto.
Back To Exchanges
But, not taking places with ‘off-the-record’ trades into account, there are over 220 exchanges out there at the moment, against about 180 six months ago. Dominating the scene right now is Binance, but for those who’ve been around a little longer, you’ve seen how fast that position can change.
For a real-time update, take a look at our #bbbkk2018 principle sponsor CoinMarketCap.
Yes, Binance launched as late as July 2017. And yes, OKEx is up there. However, OKEx has come under scrutiny for allegedly faking its trade volume numbers. It’s obvious that the volumes of many exchange volumes are doctored in a severe way, but by how much? According to this research, it could very well be over 90%. But, why does this happen?
Simply put, this is the first marketing choice for late runners or simple copycats to pretend having a big audience, to actually attract a big audience. “Fake it till you make it”.
Fake volumes provide a false image of the exchange and the market. By inflating their volume, these exchanges position themselves in a way that could allow them to defraud gullible investors. Plus, by displaying mostly artificial volumes, the currencies/tokens look more appealing to traders, as they seem to garner much more attention than they actually do. And consistently completing ‘wash-trades’ in the upper part of a spread bracket may induce people to generally ever-so-slightly overvalue the currency.
It’s not straight up illegal (yet), but it surely is misleading and dishonest. The argument made for it is the same one that kids use; ‘but they are doing it too’. Most of the exchanges are not regulated by the monetary authorities, which is why methods like this can still be exploited, seemingly with no consequences.
Another interesting topic for when we’re discussing regulatory oversight.
It’s being brought up all the time and there have been some interesting developments quite recently, such as ‘the SEC vs Etherdelta’; their first enforcement action based on findings that a platform operated as an “unregistered national securities exchange”. As stated in their press release;
“EtherDelta offered trading of various digital asset securities and failed to register as an exchange or operate pursuant to an exemption.”
Prior to a hack back in December, Etherdelta was one of the most popular exchanges for trading ERC20 tokens, and the most well-known decentralized exchange. But, as said in the intro, how ‘decentralized’ are these decentralized exchanges?
It is clear that in the future the SEC will continue to enforce actions against ICOs and exchanges that operate without complying with U.S. regulations, and many countries look(ed) to the U.S. for guidance…
So with the overshadowing regulators/regulations, another interesting move has been the move of the ‘top 2’ — Binance and OKEx — to Malta, whose government aims to make the country a ‘blockchain island’. Malta is certainly one of the world’s most progressive and forward-thinking nations when it comes to this industry.
CZ (Changpeng Zhao), CEO of Binance, said that they will soon start a “fiat-to-crypto exchange” on the European island nation, and they’re close to securing a deal with local banks that can provide access to deposits and withdrawals.
Other exchanges that moved to the Mediterranean are former top contender Bittrex and ZB.com. The decision will make the coin listing process much easier and faster than in the US and Asia. Being a one-stop shop is a must if you want to be a leading cryptocurrency exchange.
The big question: What’s next? What does the (near) future hold for crypto-currency exchanges? And how will current token prices or potential regulation enforcements affect them?
Join our panel on exactly this subject with speakers from Korbit, Monex (CoinCheck) & IDAX, moderated by Nikkei’s Nikola Pavesic. Binance’s CFO Wei Zhou will be speaking in the panel ‘The Next Step in Crypto Finance’.
We’ll also discuss the possible influence of entities like BAKKT, the potential impact of security tokens and stablecoins on exchanges and decentralized vs centralized exchanges.
Intro to panel: Cryptocurrency Exchanges — A (Not-So) Long Term Vision