The Potential Impact of More Stringent Regulations on Cryptocurrencies
Changpeng Zhao is the CEO of Binance, the largest digital currency exchange in the world. He has been a keen observer of the vacillation between bullish and bearish trends. The evidence is outlined in Bitcoin 360 AI, the trading and investment platform. Therefore, investors have been incurring plenty of losses. The losses are to the tune of U.S. $2 trillion. The equivalent of this figure in British Pounds is 1.7 trillion.
Such a disaster has prompted Zhao to suggest an improvement in existing regulations. He believes that they should be more lucid and sophisticated in wording.
How the Cryptocurrency Arena Operates
The cryptocurrency world does not depend upon brokerages and banks. In other words, it refuses to permit interference from intermediaries/middle-men. Therefore, investors feel comfortable about purchasing and selling digital currencies.
The peer-to-peer transactions take place on platforms using blockchain technology. These platforms are known as cryptocurrency exchanges. A group of validators/miners undertake the authentication of these transactions. They use the proof-of-work consensus mechanism for this action. It means that they must resolve complex mathematical puzzles.
Cryptocurrency exchanges adopt the same model that traditional stock exchanges do. It is the ‘limit order book’ model. In simple language, a centralized structure comes into play. It is perfect for sellers and purchasers. Market makers supply liquidity. They also charge investors/traders for every transaction. Such a structure has been responsible, in part, for exacerbating current events in the crypto marketplace.
The Cryptocurrency World – Problems and Solutions
Centralization vs. Decentralization
FTX had adopted a centralized model. Therefore, it was able to lend its digital assets to other cryptocurrency firms which were in distress. Similarly, the exchange also utilized FTT tokens for rounding out the books of its sister company. These tokens were exchange-issued. Unfortunately, FTX did not realize that the company was at risk of a market collapse.
In contrast, the decentralized model operates at lower risk. It is because the rules for pricing digital currencies are different. Even the governance rules are different. Investors may purchase and sell tokens in alignment with algorithmically-determined prices.
The decentralized model is automated. Therefore, there is no need for relying on professional market makers. Instead, individual investors are welcome to offer liquidity. They may even collect a part of the fees obtained from trading deals.
Right to Vote
Another feature of the decentralized platform is voting. Users, who own governance tokens, may have their say in how the exchange should operate. They express their opinions in the form of votes on proposals. In contrast, users of centralized systems may not manipulate decisions. These decisions come through from the owners of specific coins/tokens.
The idea is to permit users to take charge of their accounts. They must know what is happening to the wealth accumulated in them. Unlike the centralized FTX exchange’s custodial rule, decentralized exchanges are non-custodial. Therefore, individual investors are welcome to access their digital wallets at any time. They may deposit/withdraw liquidity, or even stop trading, whenever they want. The decentralized exchange may not freeze their assets, as FTX has done.
Decentralized exchanges refuse to let traders swap fiat currencies with digital currencies. They may only exchange cryptocurrencies. Now, the size of the liquidity pool decides the size of the trade. Therefore, if the pool is small, then, a trader may find it difficult to initiate a transaction.
Since so many exchanges are failing, the crypto world may be left with fewer platforms for conducting transactions. Investors will concentrate on these few platforms. Therefore, the competitive spirit is bound to increase. In turn, the leftover exchanges may consider reducing transaction charges. All this can take place only via protocols/sets of rules. They are scaling solutions.
To sum up, the world of virtual currencies has its strengths and weaknesses. Therefore, monitoring must be regular and more vigilant. There must also be a close observation of digital assets and investors’ wallets. Audit reports should reflect how the inflow and outflow of digital currencies are taking place.
The audits may be independent. Additional testing could come in the form of stress testing of on-chain data. It indicates the collection of information related to transactions on any blockchain network. Then again, there must be regulations in place regarding crypto loans and borrowing.