Intense industry hype and alarming cryptocurrency volatility have led regulators the world over to perk up their ears to the growing number of cryptocurrency exchanges. At first glance, it appears as if the watchdogs are coming down hard on the industry in response to anxieties over the risk of illicit and criminal activity, as well as a lack of investor protection.
These concerns are legitimate, too.
Earlier this year, Hong Kong-based Binance warned of a malfunction in its API, possibly leading customers to fall for phishing attacks. Regulators in Japan halted trading at two crypto exchanges, Bit Station and FSHO. Another Japanese cryptocurrency exchange, Coincheck, suffered a hack that led to $530 million in cryptocurrency being stolen, with not all of it being reimbursed to customers.
Earlier this month, reports surfaced that blockchain heavyweight Ripple was hitting roadblocks in its effort to list its cryptocurrency XRP on exchanges, despite reportedly offering top exchanges Coinbase and Gemini a financial incentive to allow the listing. According to analysts, the exchanges are concerned that XRP may be considered an unregistered security, as it is controlled by a single company.
These are just a few of the scenarios that suggest regulators are taking a tough stance on exchanges, whether via high-profile suspension or closure of exchanges or registration requirements.
Despite appearances, though, Aaron Travis, COO of Vaultbank, says regulators are not an enemy to the digital asset market.
“People think [regulators] are scared, but I don't think that's actually the case,” Travis recently told PYMNTS. “They realize there is going to be a new world order with blockchain and how capital flows globally, and they’re trying to figure out exactly what these digital assets are – is it a currency? A property? A commodity? And then, of course, as is getting a lot of attention and where we’re focused, the question of [whether] it is a security.”
Vaultbank announced $3 million in funding via token sale this week, as it prepares to launch Vaultbank Exchange, currently running in beta, later this year. Nearly half of that investment, the company said, has been allocated to its Vaultbank Fund, which will provide assets to back each VB token.
The company’s business model as a cryptocurrency exchange operator means the company takes the position that some digital assets are securities. That's a key distinction for its relationship with regulators, including in the U.S., where the Securities and Exchange Commission (SEC) announced last month that because these exchanges offer a way to trade assets that meet the legal criteria of a “security,” they must be registered with the SEC.
According to the regulator, and as echoed by Travis, the purpose of this oversight is to protect investors. That's a good thing, Travis noted, despite a perception in today’s market that regulators may be working against these cryptocurrency exchanges.
“Our strategy is to be open and transparent with regulators,” he explained. “We would like to be considered a resource to try to figure out what the regulatory framework is going to be.”
Vaultbank is collaborating with Gordian Compliance Solutions to ensure that its exchange remains compliant with Know Your Customer [KYC], anti-money laundering [AML] and other regulations designed to combat illegal financial activity.
Focusing on security and compliance of its platform, and offering to work with – not against – regulators, is reminiscent of the rise of another disruptive industry in the financial services space: alternative finance.
“There's been a similar experience in the marketplace lending space,” Travis said. “Originators and participants that allowed for regulators to come in and have a good look at what they were doing and how they were acting with investors really worked.”
To ensure investor protection in this area, he continued, exchanges and regulators will have to work together. The COO added that companies like Vaultbank also have to ensure investors are well-educated. Those that aren’t, he said, should perhaps step away from the industry.
“If you're on an exchange, or buying digital assets in which the originator or person selling them to you has not gone through great efforts to get to know you, and [has not] undergone KYC and AML checks, then I would be wary of it,” he cautioned. “If the platform you're buying a digital currency from is not going through those hoops – those standard, basic efforts to protect the investor – you need to be wary of that.”
These regulators aren't just for the protection of investors – they’re for the protection of the exchanges themselves, too.
John Nahas, Vaultbank's head of investor relations, added that the company actually had to turn away investors not willing to endure background checks and other security requirements.
“We had to turn away a lot of people who weren’t willing to do KYC, provide their information so we can clear who they are,” Nahas said. "We're trying to devise and bring the necessary steps that exist in any other financial market to this one. That’s the direction in which the cryptocurrency and digital asset is going toward. You're protecting the investor, and protecting yourself – and in doing so, you're protecting this new and emerging market.”