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OpEd: No, Crypto Exchanges Are Not Like Stock Exchanges | New Approaches May Help Solve Old Problems

Washington Post OpEd | Aaron Brown | Aug 11, 2022

Crypto exchange regulation - OpEd:  No, Crypto Exchanges Are Not Like Stock Exchanges | New Approaches May Help Solve Old Problems

Gensler is concerned about market manipulation, spoofing, front-running, phantom liquidity (orders that will be canceled before they can ever be executed), shadow liquidity (people willing to transact who will not expose their willingness in public orders), flash crashes and other ills. He says the New York Stock Exchange does a good job on these points thanks to SEC regulation, so those regulations should be ported to crypto exchanges.

Retail investors should have access to exchanges free from those problems. But Gensler’s stated extension is that alternative exchanges should be outlawed. Most people want regulation to give people the ability to trade safely, but only “nanny staters” want regulations to prevent people willing to take chances from trying new things.

The SEC should look at actual problems from crypto exchanges and offer technology-specific solutions. That may mean importing from traditional financial markets, but it may require new approaches.

See:  IMF: Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets

One of the most exciting crypto innovations goes by the scary name of “homomorphic encrypted orders” (HEOs). Instead of sending an order anyone can read to your broker or an exchange, you first encrypt it so no one — not even the recipient — can know what it says. A computer algorithm can match up transactions without knowing what those transactions are, nor who made them. From your point of view, a smart contract changes what you sold into what you bought and no one—not the exchange, not anyone who intercepted any messages, not the person on the other side of the trade—can know what you did. Only aggregated transactions are made public, giving price information to the market.

While this obviously raises money-laundering and insider-trading concerns — which can be addressed — it has enormous potential advantages. People are incented to reveal their entire interests since that information will never be known to anyone else. There’s no value to games like spoofing, manipulating or high-frequency trading. No one can front-run, because no one sees the trade even after it executes.

Some of these innovations have been tried on small scales with traditional assets. But only in crypto are we getting full-scale tests of these and other innovations. After a period of evolution, I have no doubt that some of them will prove so useful that all financial markets will move to them.

See:  Brookings: The Future of Crypto Regulation (On Demand and Transcript)

This is a much more promising solution to ancient problems of exchanges than a few more SEC regulations on top of what we already have. Gensler’s determination to force crypto exchanges to look like the NYSE is in no one’s interest.

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NCFA Jan 2018 resize - OpEd:  No, Crypto Exchanges Are Not Like Stock Exchanges | New Approaches May Help Solve Old ProblemsThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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