Report: Crypto Trading Platforms Not Implementing Know-your-customer Requirements

•Says 40% of trading platforms decentralized

•Global equity capitalisation rises 7.5%  half-year

Ndubuisi Francis in Abuja

A report from the World Federation of Exchanges (WFE), a global industry group for exchanges and central clearing counterparties has revealed that despite most countries imposing know-your-customer requirements, both centralised and decentralised crypto trading platforms have fallen short in implementing such measures due to lack of uniform crypto regulations.

The new report also noted that 40 per cent of the crypto-trading platforms were decentralised and make use of distributed ledger technology.

On the other hand, the majority, or 60 per cent of platforms make use of Central Limit Order Books (CLOBs), quite similar to regulated exchange platforms.

The WFE disclosed that retail demand was higher for crypto products but there was a lack of awareness on investor protection.

The report noted that there were a total of 500 crypto trading platforms offering various crypo-linked products and services. The survey saw participation from several crypto platforms offering key insights into retail and institutional demands.

The report noted that many crypto platforms opted to rely on an off-chain CLOB system for price oracles, quote display and order execution.

These entities only use the blockchain for settlement and custody purposes.

This means traders do not interact directly with the DLT, which eventually helps in saving on transaction cost.

In this way, the transaction fees only apply when orders are settled on the blockchain. Crypto-trading platforms with this type of arrangement are called centralised platforms (CEX).

According to the survey, retail demand for crypto-linked products and services was higher compared to institutional demand, except for custody services.

Institutional giants have shown a greater requirement for crypto custody services, and demand is higher.

Based on the different types of product demands by the two segments of investors, the report estimated that retail customers were less aware about the importance of investor protection.

Talking about the liquidity and customer demand, the report found that centralised exchanged enjoy a higher trading activity despite decentralised platforms offering lower transaction fees.

The report also shed light on the difference in price for same trading pairs on different platforms, leading to arbitrage opportunities.

However, the WFE report claimed this type of price fluctuation highlights a potential inefficiency issue in the crypo market.

The report further found that despite most countries imposing know-your-customer requirements, both centralised and decentralised crypto trading platforms had fallen short in implementing such measures due to lack of uniform crypto regulations.

Meanwhile, the WFE has reported that geopolitical and economic tensions have hampered expectations of a quicker global economic recovery and improved market confidence.

It stated that the various geopolitical and economic tensions that markets experienced during the first half of 2023 have hampered hopes of a faster economic recovery.

The WFE H1 2023 Market Highlights, showed that global equity market capitalisation increased by 7.5 per cent in the first half of 2023 compared to the end of the second half of 2022, representing a growth of more than $7.8 trillion in the global markets.

However, there was a drop in the global number of initial public offerings (IPOs) and in investment flows compared to the same period in 2022.

Only a few markets, notably the United States, bucked the trend.

The WEF report stated: “The data we present in this summary for the first half of 2023 reflect how these tensions have affected markets.

“Most significantly, we see a decrease in the global number of IPOs and in investment flows, which respectively fell 27 per cent and 53.4 per cent when compared to the same period in 2022.

“Only a few markets, notably the U.S., offered a positive trend. In a similar line, trading activity in the cash equities decreased across regions, reflecting lesser interest in participating in the markets.”