With the growing trend of major centralised crypto exchanges dramatically changing their terms of service to exclude customers from the US (amongst others), there is still a belief among the community that the same forces will combine together on decentralised exchanges (DEX).
There are several reasons why this isn’t going to happen on the scale that is needed, and only compliant centralised crypto exchanges will emerge victorious.
Also, this is not the first-time offshore companies and P2P platforms have tangled with regulators, so I want to recap on a few of the correlations between past lawsuits and the current situation with crypto exchanges.
Online Poker
In 2006 the US passed the *SAFE Port Act* which contained the *Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA)*, ultimately this prohibited the online gaming sites performing any transactions with American Financial Institutions.
While many of the operators closed its doors completely to US customers, a few operators including the two then largest (PokerStars & Full Tilt) continued in defiance waiting for the bill .
As with exchanges, poker sites rely heavily on centralised traffic to get the volume that the leaders are famous for. PokerStars, operating from the Isle of Man, had assured users that it could continue operating under the advice of their lawyers.
Poker, at this time was debatable whether it was in the scope of the legislation of the bill, although the DOJ openly disagreed.
By 2010 the Justice Department had spent years hunting down and prosecuting those involved in processing U.S. payments for PokerStars and other offshore websites.
Then in early 2011, known as *BLACK FRIDAY*, the justice department intervened decisively, freezing funds around the world. This included 75 bank accounts associated with the gambling firms, including Swiss accounts linked to PokerStars companies.
A little more than a year after Black Friday, PokerStars paid $547 million to settle the Justice Department’s civil claims , without admitting wrongdoing or liability.
As part of the deal, it promised to never again take U.S. poker players’ money and to ensure that the then owner, and still a fugitive, Isai Scheinberg – was no longer directly involved in running the business.
What does this have to do with Exchanges you ask?
Should an exchange be seen to be operating outside of a countries law, they may be offshore and not directly answerable to that country, but if they are deemed to be turning a blind eye to money laundering, bank fraud, violating security laws etc. then the funds are NOT safu.
Even without the seizures, compliant operators could be forced not to deal with funds originating from non-compliant exchanges, DEX, mixers etc. So your FIAT ramps in your jurisdiction would be effectively nullified.
Given that the world currently (and for the foreseeable future) operates primarily in FIAT. The possibility of this alone would severely limit the majority interest in using these services, and resulting in little volume.
P2P File Sharing vs DEXs
As with using a DEX, P2P file sharing attempts to circumnavigate laws and regulations by leaving the transaction in the hands of the users. In many places this system falls over because as with most DEX, P2P file sharing platforms largely rely on a central site/operator to maintain the network/database such as KickAss Torrents and Napster.
These operators can be prosecuted on the basis that if they are deemed capable of supervising/controlling any infringements or whether they stand to benefit financially.
Napster in this case was deemed to be financially benefiting purely on the basis that they were gaining users and it could be used to serve future business models.
This ruling throws questions over the culpability of operators such as IDEX and BINANCE DEX as they have more of a direct financial interest in their operations by giving listings and taking fees like a regular exchange does.
SEC has already landed charges on the ETHERDELTA founder for operating an unregistered exchange in November 2018, albeit a DEX.
Yes, there are true P2P file sharing operators and true DEXs and they both suffer from similar issues. Primarily - speed, a true DEX cannot deliver the speed required for high volume assets and high frequency trading.
Secondly, as a user of a P2P system you are not absolved of the laws regarding your transactions, you can still be prosecuted even if the operator can’t. The possibility of these two points alone will also severely limit the majority interest in using these services, and yet again less volume.
Using a DEX is also not a solution for the mainstream, while P2P file sharing was very widespread and common, people were happy to take the risk for a free mp3 or movie, it mainly served a different client base to the investor community. Any serious investor (retail or institutional) coming into the crypto space will not be willing to risk a portion of their portfolio on non-complaint exchanges as regulations continue to tighten.
The Resistance
There will be many that disagree with compliance, mainly those that have been in the space the longest. Like the internet, its no longer the playground it was back in the early 90s as user numbers started dramatically increasing, yet here we are using the same basic tools discussing a new one. This doesn't mean the end of DEXs and underground trading.
I do however think that these will not be the places where the next major IEOs are taking place and where the high volume assets will be traded. For the crypto space to continue to push through to the mainstream and get new money coming into the space so BTC could reach new highs, changes are going to happen.
The ideology of the past will have to adapt, and lets not forget how tainted it is with scams, as with the early days of the internet. Trusted central hubs have been formed over the years, although they are not all without fault, they serve a purpose and have also had to adapt.
The Future
The next generation of exchanges will undoubtedly be taking the market share of future trading alongside with crypto-fiat services. Coinbase are one of the few major exchanges that are looking safe in the current climate of compliance.
New competition will drive down the fees as well so Coinbase will have to adapt to maintain its share in the US/Europe, as with in Europe, the launch of Eterbase with integrated IBAN banking will surely shake up the industry.
Exchanges that are currently side stepping compliance such as Binance, Gate.io, Huobi, and Kraken (although on May 15, 2018, Powell said that Kraken "would probably get registered as a broker dealer and then an ATS" with the SEC), will soon find themselves under more international pressure and possibly prosecution if they operate without due diligence in regulated markets.
Trade Safu.
Post links
1. https://www.reddit.com/r/CryptoMarkets/comments/c1fpxw/regulation_and_crypto_how_do_we_move_forward/?utm_source=reddit-android
2. https://hackernoon.com/regulation-and-crypto-b537c781a0d
Topic: REGULATION AND CRYPTO- HOW DO WE MOVE FORWARD? (Read 83 times)
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