The paper presents the results of a survey that the WFE conducted among its members and affiliates in 2022. It provides a snapshot of the evolution of crypto-trading platforms across different jurisdictions and reports the exchanges’ engagement with these developments and their views on the future opportunities or challenges that these new technologies bring.

It also provides an overview of the setup and operation of crypto-trading platforms, contrasting the models of centralised platforms (CEXs) with those of the decentralised platforms (DEXs). The paper looks at the implications that the differences in model design between DEX and CEX have on liquidity provision, price discovery and the custody of assets; and reviews the academic literature findings about the market microstructure of these platforms. In addition, the paper discusses what these differences may imply in terms of three fundamental aspects of financial markets regulation: anti-money laundering, prudential regulation and financial stability, and investor protection.

The WFE asked the Financial Stability Board, and other international standard-setting bodies, to create a global taxonomy to drive a common understanding of whether a global stablecoin or cryptoasset fits a certain classification or definition.

"This would reduce the variance between jurisdictions and curb regulatory dissonance. A periodic review of the taxonomy would ensure that forms of GSC and crypto-assets, which have matured and may constitute a new, viable and commonly used product, can be incorporated and regulated accordingly," the WFE said.

The organisation also wants regulators to share information on global stablecoins and cryptoassets and on their issuers and the platforms on which they are traded,

"Without formalised co-ordinated approaches to enforcement and oversight in general, issues around market integrity and consumer protection will not be fully addressed," the WFE said.

The response can be summarised as follows:

• The WFE believes there could be value in adopting a single EU classification which covers both digital assets and cryptoassets, as a subcategory. Such a categorisation should, however, be mindful of any forthcoming international classification and have the ability to absorb and adopt it. It should take the form of guidance, to provide clarity, which also enables individual jurisdictions the right level of autonomy to properly and appropriately safeguard and manage the requirements of their local market structure, while also enabling regulatory deference in the regulation of digital and crypto assets in third country jurisdictions.
• The WFE supports the creation of a classification of cryptoassets at the EU level, noting that providing clarity around classification would help to build consensus and create harmony within the member states of the EU, as well as with other jurisdictions globally. The definitions should be based on the value of the assets represented, and should avoid overly detailed ‘technical’ definitions.
• The WFE continues to highlight the importance of distinguishing between so-called ‘cryptoasset exchanges’ and the regulated, secure and lit markets that established exchanges provide.
• With regards to distributed ledger technology (DLT), the WFE argues that, while its members are exploring the feasibility of DLT to provide enhanced, safer and more efficient marketplaces policy makers should be mindful of the purpose and functions undertaken by exchanges and CCPs, and that DLT cannot replace the core functions performed by those market infrastructures. 

The response outlines the importance of the roles of the exchange and CCP in the trading and clearing of derivatives contracts, bringing societal benefits as well as opportunities for individual market participants.

It notes that established exchanges offer a venue whereby exchange-traded and centrally cleared derivatives are subject to pre- and post-trade standards, set by the exchange listing and the CCP clearing the trades.

The WFE therefore welcomed the proposal that established regulated market infrastructure would be recognised by MAS as the appropriate market operators to conduct, and instil, the high standards required for the trading of cryptoasset-based derivatives contracts. It recommended, however, that there is specific inclusion and greater clarity on how third-country recognition processes might function to enable third-country market infrastructure to trade said payment token derivatives.

While recognising the MAS’s concerns with the suitability of trading payment token derivatives for retail investors, the WFE encouraged the MAS to keep the restrictions placed on trading with retail investors under review as the market evolves and matures in the stability of its trading environment. This would also enable the MAS to respond to and adopt any forthcoming global regulatory approach to cryptoasset regulation.

The WFE also suggested that trading platforms which do not fall within the high regulatory standards associated with established market infrastructure should be banned or restricted from offering payment token derivatives products to institutional or retail investors, to ensure greater investor protection, and to avoid undermining the additional processes, safeguards and extra investment required by WFE members, due to their systemic importance as central market infrastructure.

Last July, the UK financial regulator issued a consultation on prohibiting the sale, marketing and distribution to retail clients of investment products that reference cryptoassets, citing investor protection concerns.

The consultation closed earlier this month and the WFE, the global industry group for exchanges and clearing houses (CCPs), has now made its views on the matter known.

The WFE said that the FCA's proposed outright ban would envelop regulated exchanges and CCPs that operate under stringent regulations to provide pre- and post-trade risk management standards, which are designed to foster safe and efficient markets.

The WFE said it wants to help find the right balance between enabling innovative products to be traded in the UK and ensuring that they are sold responsibly, by fully regulated providers.

"The WFE recognises the volatility identified by the FCA in its consultation report and is supportive of ensuring that proper consumer protection is put in place as a priority for any new and relatively untested product on the market," the organisation said.

The WFE recommended that:

• regulators give consideration to the underlying market structures; the structure of established, fully regulated exchange and CCP operators significantly diminishes the risk profile for retail investors participating in these markets;
• there is caution in applying the same measures to exchange-traded and centrally cleared derivatives as to underlying cryptoasset markets, as this could create unintended consequences;
• options to mitigate excessive risk exposure for retail consumers should be pursued alongside the potential introduction of ‘standards’ for such products, particularly as the crypto market is evolving and maturing;
• a review on the ban (should it be implemented) as the market evolves to ensure consumer choice and access. This review is also designed to avoid international market fragmentation, particularly if international standard setters introduce a new global regulatory approach to the regulation of cryptoassets.

In its July consultation, the FCA cited consumer protection concerns to explain the proposed ban, saying that "there is growing evidence that cryptoassets are causing harm to consumers", as these cannot reliably assess the value and risks of derivatives (such as contracts for difference, options and futures) and exchange-traded notes that reference certain cryptoassets.

Nandini Sukumar, Chief Executive Officer at the WFE, said:

“Consumer protection must be foremost when seeking to regulate new and innovative products. While cryptoasset products have real potential, the market has suffered from unregulated providers distributing inappropriate products. Market infrastructures that adhere to strict regulatory requirements, embed consumer protection as part of their mandate and understand that integrity is fundamental to well-functioning markets, are best placed to deliver these products and support the developing marketplace. We ask that authorities, including the FCA, chart the right regulatory course to allow the market to flourish and benefit its consumers even as we understand that it’s a balancing act.”

The WFE recommended the establishment of a co-ordinated, widely understood and applied approach to the regulation of CTPs, under the guidance of IOSCO’s Objectives and Principles of Securities Regulation and hoped that international standard setters will continue to work together to produce a unified, global approach to the regulation of CTPs. The WFE said that this approach will likely benefit national regulators, consumers and the industry alike, as much needed certainty and clarity is introduced to the marketplace.

The response also championed the importance of technological innovation, which underpins CTPs and can benefit competition-based growth and a healthy market. The WFE advised that this innovation should operate in a balanced, fair and regulated manner, with appropriate alignment to that applied to established market infrastructure, in order to avoid detrimental impacts on financial markets and investor interests. Further, the use of appropriate and internationally co-ordinated regulation of CTPs will avoid unintentionally impeding early stage technology, and will ensure the longer-term trust and protection of consumers.