Cutting risks on cryptocurrency trading

BIZLINKS - Rey Gamboa - The Philippine Star

For Filipinos who invest in cryptocurrencies, what must have been concerning earlier this week were the cases brought about by the US Securities and Exchange Commission against Binance, two of its “unregistered” trading platforms, and its CEO Changpeng Zhao, and also on Coinbase.

The SEC accused Binance, the world’s biggest cryptocurrency exchange, of “placing investors’ assets at significant risk” while raking in billions of dollars, then filing a case against Coinbase, the largest American cryptocurrency exchange, for violations of US securities regulations.

The clampdown on the two cryptocurrency exchanges had, as expected, led to net outflows on the global crypto market, although analysts surmise that there could still be a turnaround despite the suits filed by the US’s top financial watchdog.

Whether cryptocurrencies will find a more stable role in the world’s financial markets or be just a fad is still being debated. What many top financial regulators are sure of is that more controls are needed to protect investors and users from high risks.

The concerns are not whimsical given the number of failures in crypto currencies trading in recent times. FTX, which was regarded as the world’s third largest cryptocurrency exchange by volume by the time it filed for bankruptcy protection in the US in November 2022, had supposedly lost $8 billion of customer funds.

Trading complexities

The US SEC’s moves regarding Binance and Coinbase should be understood as part of a growing concern by the world’s financial regulators on cryptocurrency trading, which is now currently valued at over $200 billion. The FTX debacle has only exposed the tenuous hold of regulators over its fluctuating values.

The 136-page complaint filed by the SEC against Binance, Zhao, and its trading platforms tackles what the regulator perceives as an evasion by the accused of regulator rules. The SEC condemned the defendants of mixing “billions of dollars” of customer money and surreptitiously sending these to a separate account controlled by Zhao.

The case, if successfully won by the US regulator, will make Binance’s operations when dealing with US citizens difficult. The global repercussions, however, will be more watched by regulators of other countries that have increasingly been exposed to dealing with cryptocurrencies.

Currently, there is no coordinated effort by countries on an international level on how to regulate crypto trading platforms. In a growing number of countries, including the Philippines, aggressive selling of cryptos is allowed.

While a framework for regulation often exists, enforcement has been challenging. Today, there are more than 400 active platforms that deal with more than 16,000 different cryptocurrencies, although bitcoin remains by far the more popular.

Cryptos, together with other new and emerging digital assets like non-fungible tokens (NFTs), have been dealt with by regulators in a rather haphazard way starting in 2021 as more widespread public acceptance of these assets forced their way in the financial mainstream.

The pressure to come up with a plausible and effective regulatory platform on cryptocurrency trading started in late 2021 when bitcoin prices fluctuated wildly and peaked at the $60,000 level, only to gradually drop to the current averages of $25,000.

With cryptocurrencies having lost heavily in trades in recent months, compared to its peaks, misery stories have surfaced of those who had gambled and lost because of what is emerging as weaknesses in regulatory and enforcement oversight.

In the US, where the largest number of cryptocurrency investors, exchanges, and trading platforms can be found, regulators’ culpability is more pronounced, hence could be one of the reasons why the SEC is taking a preemptive stance in seeking relief from what it claims are misdeeds by Binance and Coinbase.

While Binance’s sins revolve around the SEC accusation of inflating trading volumes, diverting customer funds, improper commingling of assets, failing to keep wealthy US customers off its platforms, and misleading customers about its controls, Coinbase allegedly failed to comply with disclosure requirements.

The value of trading on both cryptocurrency platforms dived after the suits were filed, although overall, crypto values remained on the same level in trades.

Growing crypto world

Investors welcome the SEC’s actions that seek to put in place better controls that can prevent a recurrence of the FTX meltdown. Banks, especially, are seeking clearer rules as pressure on them to include digital assets in their operating portfolios.

Even cryptocurrency platforms are keenly looking forward to a more defined regulatory framework that would allow them to operate within clear bounds. We can expect improvements in existing rules, even new regulations, that would keep up with the growing complexities of the crypto world.

The concept of crypto assets have expanded in popularity based on their specific natures, and its underlying values have become acceptable in a growing number of countries. The Philippines still has a small base of active crypto asset holders, although the Bangko Sentral ng Pilipinas (BSP) and the Bureau of Internal Revenue have in place requirements for operation of virtual asset service providers.

Still, there have been stories of abuse, and while these may be insignificant compared with those that have happened in the US and other countries where crypto assets are more popular, unmistakably risks abound.

The BSP recognizes that Filipinos’ exposure to crypto assets, especially cryptocurrencies, by virtue of their being migrant workers provides a conducive environment to their subscription to using virtual currency (VC) exchanges.

The VC exchanges, according to the BSP, are relatively more convenient, faster, and cheaper than traditional remittance and payment schemes, and therefore provides better benefits. But like any virtual asset, there are risks that users should always mind.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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