A few days ago, the World Federation of Exchanges (WFE) published research on crypto markets and exchanges.

This is the first research project, organized in two parts, to analyze the involvement of exchanges in the development of the cryptocurrency market, with the goal of better understanding the benefits and risks of crypto market infrastructures and how they work.

WFE deals with crypto and exchanges

The World Federation of Exchanges was founded in London in 1961 and brings together several stock exchanges from different countries. 

It has a total of 70 members, including of course the London Stock Exchange, Euronext, the German Deutsche Börse, the Swiss SIX, but also the New York Stock Exchange, Nasdaq, CME, the Shanghai Stock Exchange, the Hong Kong Stock Exchange, and so on. 

Basically, it groups together all the major stock exchanges in the world. 

In total, it represents more than 250 market infrastructure providers, including stand-alone CCPs. 

The WFE exchanges, along with other exchanges that feed into their database, are home to more than 50,000 listed companies with a combined market capitalization of more than one hundred trillion dollars. They also handle approximately $140 trillion in total annual transactions. 

So their interest in crypto markets actually means that traditional stock exchanges are interested in this new market. 

For example, the CME (Chicago Mercantile Exchange) was one of the first to allow the trading of Bitcoin futures in December 2017, and many crypto ETFs and ETPs are now traded on the Zurich exchange (SIX). 

The Hong Kong exchange is also opening up to the crypto market, not to mention the Nasdaq, where Coinbase is listed.

Thus, there have already been openings to the crypto world, albeit spotty, but the WFE’s recent interest may help the spread of crypto assets on traditional global exchanges.

The Research

WFE’s research looked specifically at the interaction of exchanges with the evolution of crypto trading platforms, as well as the opportunities and challenges that these new technologies present. 

It also examined how the demand for cryptocurrency-related products and services is changing and how regulated exchanges are responding, including through the creation of regulated crypto exchanges or the provision of crypto services.

The final research summary paper highlights how crypto trading platforms have effectively operated without meeting the standards required by traditional financial markets, with very little regulatory oversight. 

This has created more opportunities for illegal financial activities, with negative consequences for market integrity and investor protection.

In particular, the greatest risk is that crypto exchanges will also engage in ancillary activities that would not be permitted on traditional exchanges or would otherwise need to be strictly regulated. 

The implicit reference to FTX seems obvious, as they used customer funds to finance business or even personal expenses. 

The research also looked at decentralized exchanges (DEX) and how crypto platforms impact liquidity provision, pricing and asset custody.

Research Findings on Crypto Exchanges

WFE researchers analyzed more than 500 crypto trading platforms, many of which facilitate the exchange of other crypto assets in addition to cryptocurrencies and offer related products and services. 

The research reveals questions and concerns about the quality and stability of crypto markets, due in part to the rapid development of these platforms and the technological innovations they rely on, as well as their lack of regulatory approval and transparency, and the volatile nature of cryptocurrencies themselves. 

As a result, regulators are looking closely at how these markets should be regulated so that innovation is not stifled and investors are protected.

The summary paper is based on the results of a survey conducted by the WFE among its members and affiliates in 2022. 

It provides a snapshot of the development of crypto trading platforms and an overview of how they operate. 

It also examines key aspects of financial market regulation: anti-money laundering, prudential regulation, financial stability and investor protection.

The commentary

WFE Research Manager Pedro Gurrola-Perez said:

“There is a growing demand for crypto products and services. Crypto-related innovations are seen as an opportunity to advance technology development and increase investor choice, however, the lack of minimum governance and investor protection standards of unregulated crypto platforms, as well as the high volatility observed in these markets, and the risk of cybersecurity threats, is a concerning mix.”

WFE CEO Nandini Sukumar added:

“Crypto is at the forefront of all of our members’ minds and we are in constant dialogue with them about how to capitalise on the new opportunities in the area. As this industry and market matures, coming into the mainstream of financial markets, the exchange-traded model which places investor trust, transparency, accountability and investor protection at the heart of the platform, will gain further momentum.”