How are Crypto Regulations Affecting Exchanges

In the last couple of years, cryptocurrencies have become widely accepted among the general public and among large companies. With increased interest and a wider user base, governments have also turned their focus on cryptos. This is noticeable in more regulations and in stricter taxation practices.

The US government has become one of the strictest regarding crypto regulations, and some crypto businesses have left their use as a result. Crypto exchanges are feeling the effect of new regulations more than any other business since they are the intermediary for investors buying crypto.

How Crypto Exchanges Work?

The central exchanges for crypto trading function as a platform for users to buy and sell crypto. In this regard, they are similar to foreign currency or stock exchanges. Centralized exchanges operate under central authority, meaning the trades don't happen directly between peers. Some of the biggest exchanges, such as Binance or Coinbase, work this way.

Crypto exchanges are responsible for ensuring the security of users' funds and data through robust measures. They must comply with regulatory standards, prevent fraudulent activities, and maintain transparent operations. Exchanges must also ensure liquidity, fair trading practices, and customer support.

Are Cryptocurrencies Securities?

One of the areas that has come under scrutiny with new regulations is the very nature of cryptocurrencies. The Securities and Exchange Commission (SEC), which regulates the work of crypto exchanges, doesn't treat cryptocurrencies as legal tender. Instead, it treats them as security, such as bonds or stocks.

The opponents of this approach see cryptos as commodities as they are used to store value and facilitate trade. If cryptocurrencies are treated as securities, exchanges won't be able to continue providing their services since they are not set up to operate in this line of work.

Lawsuits

Due to the new regulations, the SEC has already filed lawsuits against several crypto exchanges. The biggest exchanges, Binance and Coinbase, have already been subjected to suits. Some crypto exchanges claimed publicly they expect lawsuits to be filed against them as well.

SEC has claimed they've violated the law by operating without the right to trade in securities. The issue goes to the definition of cryptocurrencies. Since most exchanges allow their users to buy many different cryptos and to use one currency to buy another, the governments will treat this action as buying securities rather than exchanging one currency for another.

Leaving the US

Some crypto exchanges have already decided to leave the US because of these policy changes. They are moving to the EU or, in some cases, Saudi Arabia or Hong Kong as a way to find new markets and get away from the US and its regulatory bodies.

Just a few days ago, Robinhood, the investment app based in California, purchased a European crypto exchange, Bitstamp, to move their business to Europe. The purchase was worth about $200 million, and it included folding Bitstamp in Robinhood services.

Effect on the Markets

The increased scrutiny also has a negative impact on the markets. Since the investors can't be sure about being able to use crypto exchanges, they may be less likely to trade. It can lead to downturns in values, at least to a certain amount. Uncertainty is usually the worst quality for a crypto market.

In the broader sense, the crypto market is doing well, especially now that traditional financial institutions are getting into it. However, the rumors about the incoming changes in regulations are also widely circulated, and they'll increase as the laws get to the courts and some crypto exchanges leave the US.

Increased Costs

New regulations will impose new costs on the crypto exchanges. Most of these are about the security and the privacy of the users. The measures governments undertake are similar to those used to prevent money laundering, and some may include Know Your Customer Laws.

Chances are that the exchanges that need to comply with these laws will transfer those costs to the users and investors. In the long run, that will make crypto trading somewhat less accessible.

Market Access and Geographic Restrictions

When cryptocurrencies first came on the financial scene, one of their most significant advantages was the ability to make transactions regardless of where you're based. Cryptos don't rely on central authority, allowing users in countries with strict regulations to make online payments undetected.

Market access will suffer if countries set up different regulations based on their political and cultural differences. At this point, it seems the EU and Asian markets will be more liberal when it comes to crypto exchange regulations, and the US is set to be conservative and restrictive.

The increased regulation efforts are affecting crypto exchanges mainly in a negative way. Now, when cryptocurrencies are widely used, the markets will have to adapt to stricter rules. In the long and mid-term, this means the exchanges may become more expensive and somewhat less accessible.