How Are Crypto Exchanges Regulated? [2024]

The growth of cryptocurrencies also gives rise to the number of platforms that facilitate purchasing, selling and exchanging of cryptocurrencies also known as crypto exchanges. As the industry expands, a critical question emerges: how are crypto exchanges regulated? As we proceed, let us discuss how these crypto exchanges are governed. It goes without saying, that knowledge of the legal frameworks in which cryptocurrencies exist is crucial for anybody who has some sort of activity in this sphere – whether it is investing, trading or developing. This blog aims at exploring the laws governing the crypto exchanges with specific reference to various jurisdictions in the world’s market and with especial examples to explain the problems arising as a consequence of such laws.

The United States: A Patchwork of Federal and State Regulations

Thus, when posing a question of how are crypto exchanges regulated in the United States, one has to explain that there is no simple answer as the regulation is shared between multiple authorities at both federal and state levels. Currently, U. S. policy regarding cryptocurrencies is following a protective policy for consumers and stability of the financial market, but also for development of blockchain technologies.

On the federal level, it is the Securities and Exchange Commission, which is responsible for the regulation of crypto exchanges focusing on the objects qualified as securities. For instance, in 2020, the SEC sued Ripple Labs that is the company behind it and accused it of conducting an unregistered securities offering through the sale of XRP tokens. This case pointed to the stand of the SEC that some of the cryptocurrencies could fall within the purview of the commission depending on the process through which they are sold. Due to this, most of the exchanges like Coinbase have limited the tokens that possibly fall under securities to reduce the likelihood of getting into the cross hairs of the regulators.

In the U. S, the Commodity Futures Trading Commission (CFTC) regulates exchanges which deal in futures and options trading with Cryptocurrencies. Thus, in 2021, the CFTC imposed a fine of $1 on the crypto exchange Kraken for reporting that it was considering offering p. 25 million for providing unlawful margined ‘retail off-exchange commodity transactions’ in digital assets, including bitcoins. It was an action that showed how the CFTC can work to make sure that crypt exchanges are following federal laws if they are providing derivatives.

That is, the U. S. has the federal regulation of crypto exchanges, as well as a set of laws that can differ in every state. For instance, the New York State came up with what is known as the BitLicense, which is a set of rules that operators of the exchanges have to pursue a license so that they can operate in New York State. The requirement in the BitLicense, established by the New York State Department of Financial Services (NYDFS) in 2015, also contains stringent measures that are connected with the corresponding type of capital, obligatory AML compliance, and consumer protection. Some of the significant exchanges include Gemini and Bitstamp that have been approved and hold the BitLicenses while exchange that have not want to distance themselves from the New York market due to the stringent regulatory frameworks in the state.

The European Union: Stricter Regulations on the Horizon

It’s the Bigger Fish, New scrutiny of the rules regulating hazardous substances in consumer products. On the topic, of how are crypto exchanges regulated in the European Union (EU), it is evident that the area is gradually extending its singular regulatory scheme. In the past, the EU’s structure has been decentralised and each member state has been responsible for the regulation of gambling. However, this is not the situation currently, especially now that the European Union in its effort to regulate the industry has passed the Markets in Crypto-Assets (MiCA) regulation.

MiCA seeks to build a single rulebook for managing crypto assets across the EU market. The regulation, known as MiCA, once in force, will impose registration of crypto exchanges in a competent authority in an EU member state and strict transparency rules, consumer protection rules and rules of conducts of the market. MiCA will also entail particular provisions applicable to stablecoins, including conservation of the sufficient reserve to back stablecoins and transparent and accurate information to be provided to the user.

For instance, Binance, one of the largest cryptocurrency exchange platforms, was recently banned in the EU because of conflicts with regulators arising from an absence of coherent policy. The past year saw various European nations, including the United Kingdom, Germany and Italy working on measures against Binance due to compliance issues with laws in those countries. Such measures spanned from advisories to complete prohibitions of some of the services being provided. It is this unpredictability that MiCA should resolve once it becomes a new set of clear and coherent rules governing all Crypto exchanges in the EU.

Germany, for instance, has been quite active in its regulation of crypto exchanges. The current legal framework in Germany does provide for the need for license which is provided by the German Federal Financial Supervisory Authority, known as the BaFin, for a cryptocurrency exchange to trade legally. BaFin has issued the first crypto custody license to Berlin’s fintech firm Bitwala in 2020 which enables it to offer the custody services in Germany to its residents. This decision showed Germany’s intention on encouraging innovation in the crypto industry and at the same time provide check and balances to the operations of exchanges.

Asia: A Diverse Regulatory Landscape

As we can see the regulation can be diverse depending on the country and in some cases even depending on the state within the country. In seeking to answer the question, ‘how are crypto exchanges regulated in Asia’, it is perhaps pertinent to understand that every country has developed a unique method. The reaction of countries to crypto exchanges varies with some countries fully endorsing while others are very restrictive if not total banning of the use of crypto exchanges.

Nowadays, Japan occupies one of the leading positions in the acceptance of the cryptocurrency, and state-regulated exchange platforms are operating in the country. Japan has incorporated the Financial Services Agency to regulate all cryptocurrency exchanges that must register with the agency and be subjected to complicated laws in regard to security, AML, and customer protection. Japan has continued to be quite forward-leaning on regulation after the 2018 hack of a Tokyo-based exchange called Coincheck, in which $530 million worth of NEM tokens were stolen. After the hack, FSA has laid down more stringent regulatory measures such as insisting on exchanges having the majority of the clients ‘Crypto Assets in cold storage, and an audit of their books at least twice every year.

However, China is much harsher on Crypto exchanges but it is a country that invests a lot in the development of bitcoins. In 2017, it launched an all-out crackdown on ICO and trading at domestic exchanges for the alleged threats to the country’s financial stability and the ability of cryptocurrencies to fund crimes. Huobi and OKEx, among others, had to shut down their operations in the country and seek new locations with favourable regulatory environment in Asia like Singapore and Hong Kong. Nevertheless, China continues to be an important market of the global crypto industry especially in bitcoin mining although the sector itself has also been on the receiving end of a rising regulatory crackdown in recent times.

Singapore has thus risen to become one of the major regional locations for crypto exchanges thanks to the liberal regulatory circumstances. The Payment Services Act (PSA) was launched by the Monetary Authority of Singapore (MAS) in 2020 solely in the context of payment services provided by the crypto exchanges. Concerning the participation in the PSA, an exchange needs a license and adhere to AML and counter-terrorist financing standards. For example, the Binance, which has well-developed connections in Singapore working under the Binance Asia Services and regulated by MAS.

Latin America: Emerging Regulation Amidst Growing Adoption

As one tries to explain how are crypto exchanges regulated in Latin America it is clear that most of the region still needs to fully address the issue of regulation properly. However, the piercing crisis of cryptos in countries such as Brazil, Argentina, and Mexico has urged the respective governments to offer some structured laws to regulate the exchanges.

Still, Brazil has made several efforts to regulate the sector of cryptocurrencies. A Brazilian Senate has passed the bill in February 2022 that offers the legal structure for the regulation of the exchanges and use of cryptocurrencies in Brazil. The latest bill up for approval by the Chamber of Deputies compels the CVM to register all the crypto exchanges as well as anyone engaged in any AML and CTF-related business. Most exchanges such as Mercado Bitcoin one of the largest in Brazil have endorsed the proposed regulations as a positive way of improving the market.

On the other hand, Argentina has not been very aggressive when it comes to legalization of cryptocurrencies. Although it has not specifically restricted crypto exchanges, it has set measures on use to ensure that flow of digital assets is regulated. In 2021, the Central Bank of Argentina (BCRA) published a directive through which it demanded that every bank and every other financial institution declare all operations affiliated with cryptocurrencies. This was one of the measures taken by the government in an attempt to check on money laundering and reduce capital flight in a country which was hugged by hard economic conditions. While no single legal structure exists for the use of cryptocurrencies in the country, increase in inflation, as well as devaluation of currencies play a key role to the increasing use of cryptocurrencies in Argentina.

Mexico too has started regulating the exchanges of crypto currency though it is in the developmental stage. The legal regulation of fintech in Mexico began in 2018 by passing what is known as the Fintech Law which created the legal structures for the operation of Virtual asset traders and other Fintechs. The rules imply the obligation to register with the National Banking and Securities Commission (CNBV) for the exchanges and reporting to it as well as following AML and CTF rules. This type of regulatory approach has not been a problem for Bitso, the largest crypto exchange in Mexico that is now also one of the largest in Latin America.

Africa: A Mixed Approach to Regulation

From the observation on how are crypto exchanges regulated in Africa, it is apparent that Africa provides a dichotomy in the regulation of crypto exchanges with an embracement of its civil use by some country while the others provide the opposite argument. The legal requirements in Africa are still emerging because stakeholder embrace different approaches depending on their economic and financial objectives.

When it comes to the regulation of cryptocurrencies, South Africa is one of the most active nations in Africa. The Financial Sector Conduct Authority (FSCA) has published regulations whereby crypto assets will be recognised by the FSCA as Financial Products. This classification would force existing and future crypto exchanges to operate as financial services providers valid under consumer protection laws and AML. A well-known crypto exchange Luno in South Africa supports such proposed regulations believing that these measures will strengthen the market and produce consumers’ benefits.

Nigeria, being one of the biggest markets in Africa for cryptocurrencies, has established rather stringent policies. In 2021, CBN through its Monetary Policy Committee banned all the banks and other financial institutions in Nigeria from providing services to the crypto exchanges. This ban led to decentralization of many exchanges to peer-to-peer trading systems where users deals directly with other users without using the services of banks. However, the ban did not slow the usage of cryptos in Nigeria, and this was due to factors such as; unstable currencies, and the desire for more access to money.

Kenya, another market that plays role in Africa, has adopted a more stringent approach as to the regulation of cryptos. Admittedly, the Central Bank of Kenya (CBK) has warned investors that these ‘ cryptocurrencies ’ attract several pitfalls but it has not banned the ‘crypto exchanges’. Rather, the CBK has encouraged the commencement of working on the formulation of a policy to counter the difficulties caused by the usage of cryptocurrencies in the country.

See Also: What Are The Best Crypto Investment Strategies? [2024]

Conclusion: Complex Landscape of Crypto Exchange Regulation

This article aimed to unravel the complexity of regulating Cryptocurrency exchange in the Global Village. What may be governing or how are crypto exchanges regulated thus needs to begin with a get-in-depth look at how different countries of the world approach the issue. Starting from the most restrictive regimes of the USA and Europe to the rather new and developing ones in Latin America and Africa, the picture of regulation is rather cloudy and, most importantly, constantly changing.

Cases like the SEC’s lawsuit against Ripple Labs in the U. S. , Binance’s problem with the European authorities, and the Brazilian bill on regulating crypto exchanges show that the nature of regulation has no limits. While some countries (over 70%) have approach the crypto exchanges as an environment with clear and friendly regulation, others have set strict measures and some have even banned the use of such exchanges because of their concerns on financial stability as well as consumer protection.

In the future as a result of enhancing of the global crypto market the authorities will introduce more effective norms for the regulation of the risks and the utilization of the possibilities of the crypto assets . To the crypto exchanges, it will be important to master the emerging legal frameworks if they are to go through legitimate changes and become equally legitimate in the eyes of users, as they are of the administrators.