Introduction

The World Federation of Exchanges (WFE) isn’t pulling any punches when it comes to crypto-asset trading platforms (CTPs). In a paper released on September 28, they laid out some blunt observations and serious suggestions about how CTPs can become more credible players in the economy. Spoiler alert: regulation is part of the deal.

Regulation: Friend or Foe?

The WFE believes that CTPs should embrace regulation instead of running for the hills. After all, who doesn’t want their market to look appealing? Their top recommendation? Segregate functions to avoid trading against customers—a point that U.S. SEC Chairman Gary Gensler has chimed in on repeatedly. Until CTPs put up or shut up, they might want to reconsider calling themselves exchanges.

Distributed Ledger Technology: A Double-Edged Sword

Integrating distributed ledger technology (DLT) into traditional finance (TradFi) could bring about mutual advantages—but only if done right. The WFE warns that if regulators clamp down too hard, they might push these services into shadowy corners where dubious characters reign. Remember FTX? That was a classic case of a financial services collapse that had little to do with the crypto universe and everything to do with poor oversight.

Decentralized Finance: A Confusing Landscape

Despite its name, decentralized finance (DeFi) isn’t as radically different from its centralized counterparts as one might think. The WFE shares that in essence, platforms where buyers and sellers converge still contain a centralized element. Just consider Ethereum’s Merge—a monumental shift that was steered largely by the centralized Ethereum Foundation team. So, where do you draw the line for regulation? They suggest a focus on decentralized applications (DApps) but leaving protocols as free spirits.

The Six Principles Every CTP Should Know

For CTPs aiming to legitimize themselves, the WFE presents a checklist of six key principles that they argue must be followed. These aren’t just guidelines—they’re a survival kit for operating credibly in the market:

• Segregation of Duties: Keep trading functions separate from customer services.
• Know Your Customer (KYC): Embrace regulations like the Financial Action Task Force’s travel rule.
• Transparency: Markets should operate with clear, open communication.
• Risk Management: Adequate systems should be in place for assessing and mitigating risks.
• Consumer Protection: Ensure users understand the risks involved in trading and investment.
• Oversight: Regular audits and compliance checks should be standard practice.