The crypto sector in the USA is buzzing with the news surrounding SEC’s latest exploits against Binance and Coinbase. The financial regulator has caused a stir in the country by questioning the structure of the cryptocurrency exchanges.
Prosecutors have raised questions over the trading infrastructure of cryptocurrency markets. By design, a cryptocurrency exchange offers a one-stop shop for investors to hold, broker, and trade their crypto holdings.
The existing structure of traditional stock exchange markets does not afford that type of convenience for its investors. It means that stock exchanges do not extend custodial or brokerage services for traders.
Meanwhile, digital asset trading forums like Coinbase can act as custodian, retail trading platform, and OTC trading services at the same time. Only digitized versions of stock trading applications may operate in the same manner as crypto exchanges on account of their automated and faster interface.
SEC has complained that Coinbase merges three separate trading processes into one platform namely brokerage, exchange, and clearing agency.
Violation of Monetary Disclosure Rule
Cryptocurrency exchanges have an intrinsic ability to automate and increase their utility by integrating various trading functions in one place such as retail brokerage, and OTC platforms, in addition to listing named cryptocurrencies.
However, stock exchanges are not fully automated like a decentralized blockchain. Therefore, the traditional stock trading process requires registering with various enterprises for the delivery of stocks, payment settlements, and secondary market trades.
In this instance, SEC has charged Coinbase with a violation of the monetary disclosure rule by Congress.
Other crypto exchanges such as Kraken and Gemini also offer OTC trading services. Interestingly all of these crypto trading forums are already regulated entities that have acquired a trading license from relevant financial regulators in the country.
In comparison, the structural difference of the stock market does not allow exchange platforms such as NASDAQ and New York Stock Exchange from offering custodial services. Therefore, stock brokers are bound to invest and revert to additional financial services providers such as BNYMellon and State Street.
These differences reduce the number of middlemen in crypto exchanges significantly smaller than in traditional exchanges making them more cost-efficient.
Dave Weisberger from CoinRoute commented on the separation of OTC trading platforms from crypto markets 6years ago. These concerns are cited on account of conflict of interest concerning the commercial and retail trading platform consolidation.
In the stock market sector, the incident of HFT Virtu had to address the potential trading risks when it decided to purchase ITG. The acquisition was completed in 2019 without any lawsuits or regulatory action.
Meanwhile, Weisberger maintained that the segregation will curb the wallet movement identification which can have a strong impact on the market movement.
He also talked about the probability of the ability to trade against the interest of majority retail positions that can put the investors at risk. In case the desk loses money, it can also hurt the invested user interests as well.
Weisberger talked with the media when asked for commenting on the matter recently. SEC served Coinbase with a Wells Notice a few weeks ago. This notice is often a prerequisite to the start of a new lawsuit and declaration of an investigation by the SEC to the served firm.
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