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As cryptocurrencies more firmly establish themselves as here-to-stay markets, a critical next step awaits: proper trade surveillance.
In a still-emerging market with an evolving regulatory framework, having the right technology and systems in place to identify and root out fraudulent or manipulative trading behavior is necessary to win the trust of market participants. The most coveted confidence is that of the large institutional investment firms, who have the most capital to deploy – and the most reputational risk.
U.S. Securities and Exchange Commission Chair Gary Gensler has been outspoken about the need for cryptocurrency markets – which have seen more than $100 billion of trading volume on peak days – to meet the same standards as long-established traditional securities markets such as equities and fixed income.
“We have rules with respect to safeguarding market integrity, protecting against fraud and manipulation, and facilitating capital formation,” Gensler said in an April speech. “If a company builds a crypto market that protects investors and meets the gold standard of our market regulations, then customers will be more likely to trust and have greater confidence in that market.”
“Crypto may offer new ways for entrepreneurs to raise capital and for investors to trade, but we still need investor and market protection,” Gensler concluded. “We already have robust ways to protect investors trading on platforms…We ought to apply these same protections in the crypto markets.”
The way forward to a sustainable and vibrant cryptocurrency market will entail a collaborative effort on the part ofregulators, market infrastructure providers and market participants alike. The SEC, European Union and other government bodies need to implement rules that ensure a fair trading experience without stifling innovation; crypto trading platforms need to have the technology in place to ferret out bad behavior.
“We’re at a tipping point with crypto markets, where it is clear that they are here to stay. A key component of any market looking to attract liquidity is integrity, and market participants want to know that they are protected no matter what asset class they are trading,” said Tony Sio, Head of Marketplace and Regulatory Technology at Nasdaq. “The onus is on crypto market operators to build confidence in their markets, and surveillance is an essential part of that.”
Sio noted that 12 years after bitcoin was created in 2009, more than 6,800 cryptocurrencies were traded worldwide, and the market capitalization of the asset class reached $2.5 trillion in May 2021. Given that growth, regulators and central banks have felt compelled to engage rather than just passively observe.
It is the large buy-side investment firms and institutional asset owners who will ultimately determine whether cryptocurrency ever entrenches itself the way equities, fixed income and FX markets are entrenched. But those organizations are generally conservative and not first movers, and they need a clear regulatory framework and assurances of fair play and transparency before getting more involved.
Sio said the industry needs to stay in front of this issue and build the market infrastructure that institutions need rather than waiting for the regulatory process to play out.
“Cryptocurrencies are maturing and becoming more mainstream,” Sio said. “So far, these firms have focused on crypto native technologies and designs; however, to be useful, they need to handle the added complexity and standards of the broader world their clients exist within. More mature infrastructure will need to handle both traditional and non-traditional finance.”
Sio concluded: “Ultimately, the crypto exchanges and participants who protect their marketplaces are most likely to inspire public confidence and emerge as market leaders.”