A Brief Look into Cryptocurrency Exchanges and their Legal Jurisdictions
This short post draws upon recent CryptoCompare research into cryptocurrency exchange jurisdictions, with a focus on how comprehensive their legislative frameworks are, relative to the number and size of exchanges that choose to base themselves there legally.
In light of the recent cryptocurrency boom that has taken place over the past year, cryptocurrency exchanges have risen rapidly in number from just a handful last year to over 200 today. They play an important role in enabling users to both own and trade a variety of cryptoassets without the technical hassle that most might find when dealing private keys, wallet security, and interacting with various blockchains. Without the liquidity that exchanges have provided, cryptocurrencies would never have reached the value and trading volumes we see today.
High volumes have led to concerns over illicit activity in the crypto space, and regulators in various jurisdictions have accordingly implemented various levels of legislation on cryptocurrency exchange activity, to protect investors and ensure that KYC and AML legislation is complied with.
The largest cryptocurrency exchanges by 24 hour volume (most of which are centralised and therefore act as custodians for users’ funds) must abide by the relevant laws in the jurisdictions in which they are situated. So where exactly are the biggest exchanges registered and what regulations are enforced by their local jurisdictions?
Well, we can see that they are based across a wide range of legal jurisdictions; within which exist varying levels of tolerance towards crypto-exchanges, as well as the comprehensiveness of the legislation that has been put forward to govern them. Contrary to what one might expect, the largest exchanges don’t necessarily all flock to regions without regulation.
The largest exchanges are either based in places with comprehensive regulation or none at all…
The above chart shows jurisdictions by number of exchanges which host over $5m of trading volume per day, with colour coding indicating the comprehensiveness of regulations towards cryptocurrency exchange activity.
Several countries have taken a hands-off, yet cautionary approach to exchange legislation, only issuing warnings that outline the risks of cryptocurrency trading (Hong Kong). Others take a more laissez faire approach with no formal legislation or announcements in place as yet (Samoa, Vanuatu, Seychelles etc).
For some of the largest exchanges by trade volume, it was found that most are registered in jurisdictions that have either incorporated crypto exchanges into the remit of existing laws (Singapore, UK, US), or have comprehensive and specific regulations that have been enacted for the purpose of regulating cryptocurrency exchanges (Japan, Malta etc).
Malta as an example…
As a case study, Malta, which is known to be relatively crypto-friendly in terms of regulation, brought in a comprehensive body of cryptoasset legislation in the Virtual Financial Assets Act (VFAA). The VFAA gave exchanges a platform to refute accusations of malpractice — by enforcing legislation against it. In Malta, exchange-fueled manipulation of crypto markets punishable by up to 6 years in jail. It also subjects the finances of exchanges to an annual external audit.
Comprehensive cryptocurrency legislation does not necessarily deter exchanges…
Malta welcomed Binance to its shores in March of this year, with OKEx following soon after — currently, one quarter of total cryptocurrency exchange volume comes from those registered in Malta.
If exchanges need to move, they will…
Other jurisdictions have issued outright bans (China), or prohibit any banks from dealing with cryptocurrency exchanges (India), resulting in a shut-down or move for exchanges previously based there. Exchanges are in quite a unique position in the financial world in that they are flexible in terms of jurisdiction — suppose regulation outstrips its proper function in any one jurisdiction, many can simply move. Examples of exchanges that have moved include Binance, OKEx and Bitfinex…the top 3 exchanges by 24h volume.
In this post, we have seen that cryptocurrency exchanges choose to register in a variety of legal jurisdictions. They often change location to avoid certain regulatory climates as exemplified by some of the largest exchanges. Nonetheless, exchanges don’t necessarily avoid more comprehensive legislative frameworks put forth to protect consumers and prevent illicit activities. This research finds that in fact, many of the largest exchanges are registered in countries that have more comprehensive frameworks in place rather than those that have none.
