There has been a long debate within the blockchain and crypto community whether regulation is really the way to go for the sector to evolve. Was it not the case that crypto was intended to release us from government control and the influence of banks over our economy?
Looking at the current market, I think it is fair to say that the ICO craze has ruined much of the credibility in the sector as such. A study by Statis Group revealed that no less than 80 percent of ICOs conducted in 2017 were scams. Funding of these scams amounted to a total of 11.9 billion USD. Bitwise Asset Management’s recent report that 95% of the trading volume reported on CoinMarketCap is wash trading, is yet another factor in this equation.
Although wash trading is an issue that deserves much more attention, I do believe there are other issues that are more important when judging the credibility of cryptocurrency exchanges, and it all comes down to regulation and transparency. Credible exchange ratings are generally hard to find at this current point and those few jurisdictions who are offering licenses for cryptocurrency exchanges have not yet circulated any easily recognizable license stamps for users to navigate around.
One of the few good examples of exchange rating sites where it is actually quite difficult to sniff up where the money comes from is Cointelligence. They stop at nothing when it comes to publicly naming and shaming companies who are not able to provide enough transparency with regards to their operations.
While losing money through investing in a scam is a tragedy for everyone involved, far more complicated risks are at stake as ICOs are now gradually turned into Initial Exchange Offerings (IEOs).
This is where the topic of regulation comes in. If you have a project and you are planning to raise money for that project through an IEO, supposedly to minimize the risk of your project being seen as an ICO scam, it is paramount to understand the difference here. While raising money through an ICO, you still have a certain control of the tokens through the wallets where the tokens are held. Single users might lose their tokens by actions or carelessness of their own.
When launching an IEO, all those tokens are effectively held on the exchange where those tokens are being listed. If the exchange, for any possible reason – including but not limited to hacking, internal fraud, criminal takeover, technical error, interference of regulatory authorities – ceases to exist, all those tokens are lost. The token issuer will be the one everyone will turn to with requests of cleaning up the mess.
Listing on unregulated exchanges in order to launch IEOs will always be coupled with this risk. That is why proper regulation of the crypto sphere is indeed quite attractive. One of the good news pieces to take from the recent report about fake volumes and wash trading is that the real trading activity in the crypto sphere is actually unlike any other asset class. Bitcoin is turning over more than 10 per cent of its market cap every 24 hours. This indeed, is actually unique.
As for the current debate on whether exchanges should be regulated or not, I believe there is one answer which will cut across any ideological alignments over the issue: let the market be the judge, and we will see how attractive the IEO selling point will eventually become for unregulated exchanges.