Regulatory compliance is an important part in any business especially cryptocurrency exchanges. At this point in time however, proper worldwide regulations are not yet implemented. Each country follows it’s own independent way of dealing with cryptocurrencies and have specific laws and guidelines set in place. Some countries like China have placed a blanket ban on Bitcoin and ICOs while others like HongKong, US, Russia and Singapore are embracing it. The difference in viewpoints creates the current cryptocurrency environment and exchanges also have different ways of addressing the situation.Currently there are two approaches and steps taken by the leading cryptocurrency exchanges as well as upcoming ones with regards to regulation and compliance. Choosing and taking the right one is a make or break business decision.
The rabbit approach
It is called as such because of the nature of the approach in handling regulation. Since in the crypto scene there are not so many rules to go around and regulatory standards differ from one country to another, exchanges are taking advantage of a fast-paced and agile development which focuses more on user acquisition and market dominance short term.
When it comes to wooing customers, nothing does it better than seeing big volume on an exchange even if unscrupulous means are used to do so. Here are some of the most recently used tactics:
Transaction mining
This is an “ICO in disguise” so to speak. Transaction mining is a method new exchanges do to be able to gain new userbase and volume. Some of these famous ones who just recently did it are Fcoin, EXX, and Coinbene. This has been the cause of sudden volume pumps without corresponding significant price increase or decrease with Bitcoin the past couple months and we see these new exchanges with unrecorded volumes.
These exchanges usually have their own native coin as well. “Transaction mining” usually gives out big incentives such as points or offering to payback in 100% the fees generated from BTC/USDT, BTC/ETH, ETH/USDT trading in their own native coin. For market makers and large capital firms, this is an easy catch since all they have to do is to trade on these exchanges and collect the native tokens. This in turn creates a ripple effect and they gain their volume rise as well as top spots on coinmarketcap for the time being.
Wash trading
This is the process of faking trades within the exchange in order to get volume. There is one exchange that has been very liable for this form of act but I will not mention them here. Once again, the more volume an exchange shows, the more trustworthy it is to people and the result is that they tend to be able to win over more potential customers even if that volume is fake.
Those are the two recent tactics to increase user base where a lot of exchanges are guilty on. Another part of the rabbit approach is being able to dodge government jurisdiction.
Jurisdictional Arbitrage
According to investopedia, it is the practice of taking advantage of the discrepancies between competing legal jurisdictions. It basically means jumping your operations from one country to another in chase of greener pastures, to mitigate legal or government related problems or to get away from legislation. This was a smart move done by CZ of Binance when they moved from China to HongKong and now to Malta. Binance moved out of China because of the blanket ban last year. However, this was done as a last resort.
The rabbit approach is viable in the short term but regulations will catch up and if the exchange does not know how to turn the tables in their favor then it may take a toll on their businesses or it may even be the whole cause of its downfall. The opposite approach is what I call the turtle approach.
The turtle approach
This approach, although a bit slow, takes into account setting down a foundation first especially with the jurisdiction in which an exchange’s headquarters is located. Paymium with it’s exchange Blockchain.io is spearheading a new breed of modern exchanges with this approach. Here is what they are doing:
Becoming fully compliant
It starts out with appeasing the law and acquiring all the regulatory requirements in line with operating a fintech business in your country’s jurisdiction. In this case, Blockchain.io complies with all EU regulations having its headquarters in France.
Does not necessarily need to start as an exchange
Paymium, the mother company of Blockchain.io started out as a Bitcoin merchant offering custodianship via a web wallet. They started out supporting Bitcoin only at first.
SEC registered
Paymium, the mother company of Blockchain.io has filed for SEC Form D which means that whatever tokens they are offering are not deemed as securities.
Organic growth
Blockchain.io believes in getting customers organically and growing the community and incentivizing good community behavior.
Blockchain.io takes the turtle approach in dealing with regulation. In short term, the rabbit approach may be fast paced, disruptive and appealing but in the long run, we all know who wins the race.
Overall, compliance to regulation should be top in the priority list of any emerging business especially in the cryptocurrency sector. Not only that, but the public as well as those within the crypto sector should also be the ones who will spearhead the movement and help create those regulations. Traditional governments are old and wary. If they see something disruptive and something which they do not understand, they simply shove it off, delay regulation or if worse comes to worse, make it illegal or do a blanket ban. The fate of the propagation of cryptocurrencies the right way is the challenge of our current generation.
