Crypto market design is now a priority for World Federation of Exchanges

Rick Steves

“With the WFE’s unique position and global view of market structures, our access to data and information, reinforced by our own analysis & research, and the expertise we have built up through experience, we look forward to engaging with stakeholders in 2024 and championing the role of public markets and market-based finance.”

The World Federation of Exchanges (WFE), the global industry group for exchanges and CCPs, has announced its 2024 priorities for the exchange and clearing industry.

The WFE highlighted regulated market infrastructure providers as the financial system’s foundation, aiming to maintain trust in neutral, responsible public markets. The year 2024 brings new opportunities to reinforce this commitment.

Nandini Sukumar, CEO at the WFE, said: “The WFE Board has determined the key priorities and issues we will focus on this year. With the WFE’s unique position and global view of market structures, our access to data and information, reinforced by our own analysis & research, and the expertise we have built up through experience, we look forward to engaging with stakeholders in 2024 and championing the role of public markets and market-based finance.”

WFE priorities include ESG, Education, Crypto, and AI

The 2024 priorities for the WFE are to develop market structures that are efficient, resilient, robust, fair, transparent, and stable. These priorities include:

  • Enhancing corporate governance across the financial ecosystem, moving beyond the current focus on regulated entities.
  • Strengthening the role of CCPs in ensuring market stability, with emphasis on procyclicality, recovery and resolution, transparency, and capital rules, reflecting lessons from past financial crises and the global pandemic.
  • Leading ESG initiatives in market infrastructures, focusing on standardization, harmonization, and reporting frameworks, exemplified by the WFE Green Equities principles.
  • Expanding the WFE Education initiative, particularly the Market Infrastructure Certificate, to nurture future industry leaders.
  • Exploring new technologies, such as the evolution of crypto market design and the role of AI, as these markets increasingly align with regulated exchange markets.

The WFE, representing over 250 market infrastructures worldwide, aims to unify its members in achieving these goals, guided by four strategic pillars: advocacy, education, emerging markets, and post-trade.

The organization will continue its work in policy and research across these areas, developing industry consensus, best practices, standards, and guidance, while addressing emerging trends.

WFE proposed 6 key principles for Crypto trading infrastructure

In a bid to address ongoing concerns and challenges within the cryptocurrency trading landscape, the WFE published a comprehensive report titled “Promoting Sound Marketplaces – DeFi/CeFi, Crypto Platforms & Exchanges”, in September 2023.

Drawing upon the collective wisdom of regulated market infrastructures, the report outlines six key principles aimed at promoting secure and reliable crypto trading environments. These principles, based on proven regulatory frameworks from established market infrastructures, offer a roadmap for governments and regulators to foster crypto industry growth while safeguarding investors and ensuring transparent and fair markets.

The nascent cryptocurrency industry has been marred by controversies and notable collapses, underscoring the need for regulatory clarity and market integrity. The WFE report seeks to bridge the gap between traditional financial markets and the burgeoning world of digital assets. It emphasizes that while Decentralized Finance (DeFi) has brought innovation to financial products, crypto trading platforms (CTPs) often lack the decentralization they claim, which introduces certain risks.

The WFE’s recommendations are as follows:

Segregation of Market Infrastructure: The report suggests that CTPs should segregate market infrastructure functions where applicable, such as limiting CTPs from trading their own books or engaging in activities that conflict with their customers’ interests.

Orderly Market Operation: To maintain market integrity, CTPs should establish systems and controls to address broader risks, including abusive trading practices.

Adequate Financial Resources: CTPs must maintain sufficient financial resources to withstand expected operational stress events, ensuring uninterrupted market functioning.

Best Execution Compliance: Facilitate compliance with best execution requirements to ensure fair treatment of market participants.

Enhanced Listing Standards: The report recommends strengthening listing standards to enhance market robustness and protect investors.

Governance and Management Requirements: CTPs should adhere to appropriate governance and management standards to ensure operational efficiency and accountability.

Centralized exchanges vs. Decentralized exchanges

A recent research paper published by WFE, titled ‘A review of crypto-trading infrastructure,’ delved into how traditional exchanges are interacting with the evolving landscape of crypto-trading platforms across various jurisdictions. It explores the opportunities and challenges posed by these technologies and how regulated exchanges are responding. This includes the establishment of regulated crypto-trading exchanges and the provision of crypto-related services.

The cryptocurrency market has largely operated without the stringent standards applied to traditional financial markets, often lacking regulatory oversight. This research underscores how this environment has created opportunities for illicit financial activities and the potential consequences for market integrity and investor protection.

The study also delves into the implications of differing model designs between decentralized platforms (DEX) and centralized platforms (CEX) on liquidity provision, price discovery, and asset custody. Furthermore, it evaluates the potential impact of these differences on fundamental aspects of financial market regulation, such as anti-money laundering, prudential regulation, investor protection, and financial stability.

In today’s world, there are over 500 cryptocurrency trading platforms worldwide, with many of them also facilitating the trading of various crypto-assets and offering related products and services.

The rapid development of these platforms, their reliance on technological innovations, their lack of regulatory authorization and transparency, and the volatile nature of cryptocurrencies have raised numerous questions and concerns about the quality and stability of these markets and their potential implications for mainstream finance. Regulators are closely scrutinizing how to regulate these markets effectively to balance innovation and investor protection.

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