World Federation of Exchanges proposes 6 key principles for crypto trading infrastructure

Rick Steves

“These six key principles should be a checklist for any CTPs that are serious about meeting the standards expected of a credible operator of markets. Observing the standards will not only safeguard markets, it will enable the sector to grow.”

Bitcoin in a few hands

In a bid to address ongoing concerns and challenges within the cryptocurrency trading landscape, the World Federation of Exchanges (WFE), a global organization representing exchanges and central counterparty clearing houses (CCPs), has published a comprehensive report titled “Promoting Sound Marketplaces – DeFi/CeFi, Crypto Platforms & Exchanges.”

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.

Crypto trading platforms often lack the decentralization they claim

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.

“A checklist for any CTPs that are serious”

In the short term, the WFE urges CTPs to disclose their regulatory status transparently and refrain from describing themselves as exchanges until they meet the recommended standards and regulatory requirements. This approach aligns with the standards adhered to by regulated market infrastructure providers, fostering market confidence and trust.

Nandini Sukumar, Chief Executive Officer at the WFE, said: “The exchange industry continues to believe in the promise of crypto trading and digital assets and is working with all stakeholders to evolve market structure and standards to the level necessary to facilitate growth and trust in these markets. These six key principles should be a checklist for any CTPs that are serious about meeting the standards expected of a credible operator of markets. Observing the standards will not only safeguard markets, it will enable the sector to grow.”

Richard Metcalfe, Head of Regulatory Affairs at the WFE, said: “Governments and regulators helped to shape the ethos of the current market infrastructure so that it operates in the trusted manner it currently does. The same logic must apply to CTPs, whether centralized or not, to prevent the significant risks and realities we have seen that can, and do, harm investor trust.”

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