WFE reviews crypto trading infrastructure: CEX vs. DEX
“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.”
The World Federation of Exchanges (The WFE), the global industry group representing exchanges and central counterparties, has released the first part of a comprehensive research project examining the engagement of traditional exchanges with developments in the cryptocurrency market.
This research paper, titled ‘A review of crypto-trading infrastructure,’ aims to provide insights into the benefits, risks, and functionality of crypto market infrastructures.
How traditional exchanges are interacting with crypto trading platforms
The WFE’s research delves 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 decentralised platforms (DEX) and centralised platforms (CEX) on liquidity provision, price discovery, and asset custody. Furthermore, it evaluates the potential impact of these differences on fundamental aspects of financial markets regulation, such as anti-money laundering, prudential regulation, investor protection, and financial stability.
500+ crypto trading platforms worldwide
Dr Pedro Gurrola-Perez, Head of Research at the WFE, 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.”
Nandini Sukumar, CEO of the WFE, said: “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 in to the mainstream of financial markets, the exchange-traded model which places investor trust, transparency, accountability and investor protection at the heart of platform, will gain further momentum. ”
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.
CEX vs. DEX in liquidity, price discovery, custody, regulation, AML, financial stability, investor protection
The World Federation of Exchanges is conducting a two-part research project to enhance the understanding of crypto market infrastructures and contribute to discussions surrounding their benefits and risks.
This first part of the research presents the results of a survey conducted among WFE members and affiliates in 2022. It provides an overview of the evolution of crypto-trading platforms in various jurisdictions, exchanges’ engagement with these developments, and their perspectives on the future opportunities and challenges these new technologies bring.
The research also explores the setup and operation of crypto-trading platforms, highlighting the differences between centralized platforms (CEXs) and decentralized platforms (DEXs). It addresses the implications of these differences for liquidity, price discovery, asset custody, and regulatory aspects, including anti-money laundering, prudential regulation, financial stability, and investor protection.
The research project underscores the WFE’s commitment to ensuring that technology serves as an enabling and effective force for good in financial markets, providing insights and analysis that can contribute to informed decision-making in the evolving world of cryptocurrencies and digital assets.