More Problems With Centralized Crypto Exchanges

EXCHANGES • FROM CRYPTO.IQ

One of the knocks against the cryptocurrency ecosystem is the steady stream of problems with centralized crypto exchanges. This has also been a significant barrier to adoption as new users have had difficulties onboarding to exchanges and have faced abysmal customer service. And new users and veterans alike are concerned with repeated hacks, the latest being Korean exchange Coinrail. Without revisiting in detail these problems that have plagued centralized exchanges for years, there’s yet a new problem to contend with.

This time Cryptopia, an exchange based in New Zealand, is the canary in the coal mine.

Although most governments have not set clear rules and regulations on cryptocurrencies yet, they are preparing for it. And in New Zealand’s case, they’re telegraphing how they are going to approach it. Regulators are working closely with Cryptopia to scrutinize the coins listed there, specifically which ones might be securities. While we don’t know what was said behind the scenes, the result is that Cryptopia has delisted a number of coins.

Many coins may have been delisted due to lack of activity or support from developers, but at least some were delisted due to the possibility that they could be securities. In fact, that was the stated reason in an email Cryptopia sent to users:

“Cryptopia is registered as a Financial Service Provider in New Zealand. This registration only allows us to list coins that are not ‘Financial Products’ on our exchange.”

Most of the delisted coins are pretty far under the radar except perhaps for the popular TenX (PAY) which is ranked 130th by market capitalization on CoinMarketCap.com. We’ve noted in the past that it is likely a security by most definitions.

This is a long term problem for centralized exchanges. As the threat of regulation heats up, more exchanges may be preemptively delisting borderline securities to head off the authorities. Cryptopia’s regulatory wrinkle is one we’re likely to see repeated on other exchanges. And they may be delisting some of their more popular coins.

So what’s going to happen with coins that are likely to be securities as they begin to be delisted from various exchanges? It is highly unlikely that crypto investors will abandon coins that may be deemed securities by regulatory bodies. In fact, investors like them specifically because they have qualities that make them securities. Where will investors go to get them?

We’ve made the case for decentralized exchanges before, but this kind of forced delisting may be the catalyst they need to see increased utility and liquidity. We could see a growing stream of investors away from centralized exchanges and toward decentralized exchanges like IDEX, Switcheo, and others. Veteran crypto investors have had enough.
It is interesting that two of the most important centralized exchanges, Binance and Coinbase, both of which had revenues and profits even better than some major global traditional banks last year, already have plans for a decentralized counterpart. They’re staying ahead of the movement toward decentralization. It’s clear that centralized exchanges are starting to see the writing on the wall — they either go full compliance and work closely with regulators and potentially have to delist popular coins or develop an alternative decentralized solution.

Ultimately, this will help the cryptocurrency industry. But it will take a while to play out, and there will be some turmoil in the meantime.

We’re likely to see some price shocks and disrupted trading as delistings crop up out of the blue. This will present investing and trading challenges for security coins like TenX. But keep an eye on coins that can benefit from this such as Binance (BNB), IDEX’s coin AURA, Switcheo (SWTH), and 0x (ZRX), whose protocol is used in Coinbase’s decentralized exchange acquisition Paradex. With turmoil there comes opportunities.