How are Crypto Exchanges Regulated?


Regulation has been a boogyman for cryptocurrency since its inception in 2010. Some fans of crypto think the point of the decentralized currency is for it not to be regulated. Others see regulation as a sign of a mature market and the rise of crypto as a legitimate currency. 

Regardless of your own position, cryptocurrencies are constantly undergoing new regulations across the world, and prices are often tied to how those negotiations pan out. 

U.S. Cryptocurrency regulation 

Currently, in the U.S., there is no single overarching regulatory body for cryptocurrency. Instead, there is only a patchwork series of federal and state laws that keep things manageable.  

FinCEN, a national regulatory bureau, issues licenses for cryptocurrencies. These licenses are required for cryptocurrency exchanges to stay open and legitimate. They allow for foreign exchange, background checks, money transfers, and sales with prepaid access. But they also come with substantial fees.  

Cryptocurrency exchanges must also be registered as money services businesses and must inform law enforcement of any suspicious activities on their platforms. This last requirement has put many exchanges on a knife’s edge as they try to respect their customers’ privacy concerns. 

Currently, exchanges do not undergo regulation in the U.S. when they decide to host a new cryptocurrency. This means fraud and manipulation can quickly arise. However, an exchange gets reviewed and regulated when it would like to IPO, like Coinbase (ticker: COIN) earlier this year.  

Crackdowns and Regulation Fears Around the World 

Regulation and crackdowns have put a lot of pressure on cryptocurrencies worldwide over the past year.  

In Turkey, a crackdown on crypto in April led to the country’s major exchanges disbanding after a ban was implemented on the direct use of crypto as payment. This was coming at a time when Turkey’s currency, the lira, is experiencing almost 18% inflation per year, and crypto is one of the only solutions available to citizens to save their money. 

In China, cryptocurrencies have always had a rough time under lawmakers’ scrutiny. This year they have put out even more serious bans and arrests. Many analysts feel that this time is stronger than previous crackdowns, with over half the known crypto mining operations in China going dark after the news. 

Information on the current regulatory practices for many other countries is summed up in the following report.  

Why Regulation Might be a Good Thing 

Without regulation, many lawmakers are afraid that fraud and manipulation will run rampant in cryptocurrency circles. Unfortunately, this has proven true in many instances where “pump and dump” schemes for ICOs (Initial Coin Offerings) have become popular. A pump and dump scheme is when financial influencers hype up a coin in the hopes of getting as many people to buy into it as they can to sell immediately after the price is artificially raised. 

This practice can get you in a lot of trouble in the stock market but has become commonplace in the crypto sphere.  

These schemes ruin trust in the cryptocurrency market and have led many investors to become highly cautious when dealing with new coins, putting a cap on the potential pool of overall investors. 

More controversially, some U.S. regulators are interested in mandating that users verify their identity when transferring money to and from crypto wallets held outside of exchanges. This would stop one of the only unregulated means left of transferring crypto to one another and protecting one’s privacy. 

In case you weren’t aware, when you trade crypto on an exchange, most countries can track the trajectory of that crypto to some degree for taxation and anti-fraud purposes. Thus, your transactions on these exchanges are not fully private. 

However, in peer-to-peer transfers of crypto from offline wallets, the trade remains unregulated and legal in the U.S., presenting a big problem for lawmakers trying to regulate financial markets. 

A Third Option: Self-Regulation 

Some crypto advocates are calling for the self-regulation of exchanges based on a set of guidelines across the industry. A code of conduct, if you will.  

Undergoing self-regulation would enforce anti-fraud and money laundering measures such as Know Your Customer validation, providing greater transparency, and enforcing standardized security measures.  

After a hack in major exchanges in Japan, the country made efforts to allow for the self-regulation of their crypto exchange markets.  

In the end, this may only be a temporary solution that still requires government regulation. Even so, a set of standards would be a good start to keep a balance between the different goals of cryptocurrency investors.  

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