Crypto-Asset Exchanges: Current Practices and Policy Issues
INSIGHTi
Crypto-Asset Exchanges: Current Practices
and Policy Issues
July 23, 2021
Crypto-asset exchanges, which include cryptocurrency exchanges and are also referred to as digital asset
trading platforms, are market structures where digital asset buying and sel ing can occur. Some industry
observers perceive digital asset trading platforms as similar to securities exchanges in functionality.
However, they are general y not subject to the same regulatory regime, leading to policy debates
regarding market integrity, investor protection, and the need to foster financial innovation.
Trading Platforms as Money Transmitters
Many crypto-asset exchanges are registered as money transmitters, a type of money service business
licensed at the state level. Money transmitters are subject to registration and reporting requirements from
the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department responsible
for implementing the Bank Secrecy Act (P.L. 91-508). For example, money transmitters are required to
verify customer identity and record beneficiary information for transfers of $3,000 or more and are
required to file “Suspicious Activity Reports” for certain transactions exceeding $2,000. In 2013, FinCEN
issued interpretative guidance for crypto-asset exchanges, stating that an “administrator or exchanger that
(1) accepts and transmits a convertible virtual currency or (2) buys or sel s convertible virtual currency for
any reason is a money transmitter under FinCEN’s regulation.”
Trading Platforms as Securities Exchanges
Because money transmitter regulation is focused mostly on state licensing, some argue that this
framework is insufficient for large-scale interstate and international digital asset trading activities. For
some observers, regulating crypto-asset exchanges as money transmitters raises investor-protection
concerns, because although some view them as functional equivalents to stock exchanges, they are not
subject to the same type of investor protection regulation as those exchanges.
Crypto-asset exchanges could be subject to regulation from securities and commodities regulators. Under
the Commodity Exchange Act (P.L. 74-675), the Commodity Futures Trading Commission (CFTC)
regulates derivatives exchanges (for example, exchanges trading Bitcoin futures rather than Bitcoins). The
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CFTC has the authority to bring enforcement actions for fraud and market manipulation involving digital
asset commodities spot and forward transactions. However, observers point out that the CFTC does not
otherwise regulate these markets or market participants.
In addition, the SEC issued a statement clarifying that the online platforms for buying and sel ing crypto
assets that qualify as securities could be unlawful. The SEC took its first enforcement action against an
unregistered crypto-asset exchange in 2018. The agency stated that the platform “had both the user
interface and underlying functionality of an online national securities exchange and was required to
register with the SEC or qualify for an exemption” but appeared to have failed to do so.
Crypto-Asset Exchanges Versus National Securities
Exchanges
The differences between crypto-asset exchange investor protections under current regulation and what
they would be if most or al were regulated by the SEC as national securities exchanges could include
requirements to increase transparency, fairness, and efficiency. These are guiding principles in national
securities exchange regulation, yet some perceive them as lacking in crypto-asset exchanges’ current
practices. The downsides of heightened regulation may include increased compliance costs, hindrance of
financial innovation, and competitive pressure for resources and talent international y.
Nontransparent, Fraudulent, and Manipulative Activities
Many crypto-asset exchanges (including those that general y al ow trading of digital assets that are not
securities and thus not regulated by the SEC) are reportedly exaggerating their volumes to attract more
participation. Many investors may not know whether the trading volume and prices reflect real activities
or market manipulation. To take the more frequently studied digital asset Bitcoin, for example, one study
showed that 95% of Bitcoin’s trading volume displayed on digital asset price and volume aggregator
CoinMarketCap.com is either fake or non-economic in nature. Another academic study il ustrated the
large scale of potential damage that digital asset market manipulations could create, underlining investor-
protection concerns.
One observer stated that “when you go into one of these exchanges, you don’t know whether the order
book is accurately reporting the bids and the offers. You don’t real y know if there is front-running. You
don’t know whether some of the trading that is reported is real or fake.”
Network Congestions and Market Inefficiencies
Unlike SEC-regulated exchanges, crypto-asset exchanges frequently face network congestions or trading
halts, leading some to question the readiness of these exchanges to serve a growing marketplace. For
example, during a rapid digital asset sel off and recovery in May 2021, multiple major crypto-asset
exchanges reportedly encountered technical issues, further intensifying market stress during a volatile
time of increased trading. These market disruptions could generate investor protection concerns due to
investors’ inability to get in and out of their investment positions in a timely manner or investors’ inability
to seek best execution for their trades—common features of a fair and efficient trading system.
Policy Proposals
Many observers have cal ed for changes to the regulatory framework governing crypto-asset exchanges.
Some have questioned whether digital asset trading warrants more regulatory safeguards. SEC Chair Gary
Gensler has asked Congress to provide more clarity regarding authority over crypto-asset exchanges.
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Gensler stated that the lack of oversight of crypto-asset exchanges represents a “gap in our system” that
denies traders basic investor protection—such as the protections found in traditional securities markets.
Members of Congress followed up with inquiries into the agency’s authority over crypto-asset exchange
regulation. Opponents of stricter regulation voice concerns that new regulation may hinder innovation and
place the United States at a competitive disadvantage relative to other countries.
Additional y, the use of state and federal bank charters by crypto-asset exchanges has the potential to
affect how these exchanges are regulated. The Comptroller of the Currency (OCC), which charters and
regulates national banks, reportedly developed a new charter for national payments institutions, which
would provide a nationwide licensing and regulation platform for money transmitters. To the extent
crypto-asset exchanges obtain such a license, they would be subject to certain prudential and consumer
protection regulations promulgated by the OCC and other banking regulators.
Related CRS Products
CRS Report R46208, Digital Assets and SEC Regulation, by Eva Su.
CRS Report R46486, Telegraphs, Steamships, and Virtual Currency: An Analysis of Money Transmitter
Regulation, by Andrew P. Scott.
Author Information
Eva Su
Andrew P. Scott
Analyst in Financial Economics
Analyst in Financial Economics
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