The evolution of crypto exchanges

Cryptocurrency exchanges started as a means to enable crypto enthusiasts to trade digital coins outside the traditional financial system on a decentralized and largely autonomous basis.

As crypto exchanges have improved their systems to meet AML and investor protection requirements, there is a begrudging recognition that these platforms have brought much-needed modernization and democratization to a market that has generally been seen as remote and privileged.

Crypto exchanges have provided 24-hour, global access to trading venues with participants eligible from all walks of life and able to participate directly through accessing online trading tools and graphics, which have historically been available almost solely to a limited set of professional investors.

At an EU-wide level, the position so far has been to apply the existing regulatory framework to crypto assets that have the characteristics of regulated assets.

Importantly, this means that crypto exchanges trading digital securities, such as DLT-based shares, bonds, fund units or derivatives - often referred to as security tokens - are required to obtain authorization as regulated trading venues to do business in the EU. This would also capture EU-based crypto exchanges trading particularly popular instruments, such as derivatives referencing Bitcoin or other cryptocurrencies as underlying assets.

Some of the largest crypto exchanges are looking to obtain regulatory licences across the world in order to be able to directly compete with incumbent financial institutions, adapt to user demand for more sophisticated services, and enhance their own credibility in the market.

With a view to enhancing market integrity and investor confidence, the EU Commission put out a proposal on Sept. 23 for a regulation on markets in crypto assets, or MiCA. The draft regulation captures crypto assets such as "Asset-referenced tokens" as well as "Utility tokens."

Under the MiCA draft, crypto exchanges operating in the EU are required to obtain regulatory authorization and are subject to strict prudential and conduct requirements.

Is likely to be a significant step toward establishing credibility and structure in creating a viable crypto asset industry in the EU, which will identify the contrasting regulatory framework for security-type crypto assets and non-security-type crypto assets.

Going forward, the innovation, democratization and expansion of access brought about by crypto exchanges, as well as an improved financial regulatory recognition of their services, will be combined with the digitalization of traditional asset securities and development of market infrastructure for digital trading.