Proactive Investors - Draconic regulatory shakedowns of the world’s largest cryptocurrency exchanges are not enough to dissuade Big Finance from muzzling in on the trillion-dollar cryptocurrency market, it seems.
This week sees the launch of brand new US-based crypto exchange EDX, backed by multinational TradFi heavyweights Fidelity, Charles Schwab (NYSE:SCHW) Corporation and Citadel Securities.
EDX was first announced in the unfortunate month of September 2022, just two months before FTX, formerly the world’s second-largest cryptocurrency exchange, collapsed, bringing most of the crypto market with it.
This delivered what could – perhaps even should – have been a fatal two-punch blow to EDX’s plans.
Not only did the crypto markets close 2022 a mere third of what they were at the start of the year, but FTX’s calamitous collapse ushered in a wave of hawkish regulatory enforcements and a crackdown on any and all crypto exchanges operating within US borders.
Starting with Kraken, ostensibly a small fish in the crypto pond despite its name, the US Securities and Exchange Commission (SEC) under crypto permabear Gary Gensler led a crusade against what he considers an illicit market trading in unregistered securities.
Changpeng ‘CZ’ Zhao’s Binance, currently the world’s largest cryptocurrency exchange, became the biggest target in the SEC’s crosshairs, but Nasdaq-listed Coinbase Global Inc (NASDAQ:NASDAQ:COIN) soon found itself prey for the securities watchdog too.
These crackdowns have placed a question mark over Coinbase’s and Binance’s futures in the US market.
Yet amid all of this uncertainty, Fidelity and friends proceeded with their EDX plans, and have now successfully opened shop to clients.
Playing ball
Surely this isn’t fair, right? The SEC has not uttered a word about the new offering from these TradFi darlings, despite Gensler trying his utmost rain on the crypto parade.
That’s likely down to the fact that EDX is designed to play ball with the regulators.
Firstly, EDX touts a non-custodial design, meaning EDX is able to avoid the brokerage tag that has become a major headache for existing crypto exchanges.
As Gensler stated earlier this month: “Separation of these core functions (crypto trading and custody) helps mitigate the conflicts that can arise with the commingling of such services.”
However, it is unclear who will be facilitating these custodial practices in EDX’s place.
Back in September 2022, stablecoin developer Paxos was pipped to take control of the exchange’s custodial needs.
This partnership has all but certainly dissolved; Paxos was also accused by the SEC of securities violations. Proactive has reached out to EDX for further details on this matter.
Secondly, EDX is extremely limited in its offering, at least for the time being.
Only Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Bitcoin Cash (BCH) are currently offered as tradeable products, none of which has been the focus of the SEC’s regulatory crackdown.
Thirdly, EDX’s entry requirements go beyond a quick KYC check. Per the group’s official rulebook: “Businesses and institutions that hold the applicable registrations and licenses, and satisfy the financial, credit, and related qualifications established and maintained by the exchange are eligible to be, and to remain, members.”
That should leave only the most sophisticated of dark web criminals with potential access to the platform.
Fourthly, on a speculative note, EDX is backed by the institutional in-crowd, and comes with centuries and combined institutional financial expertise that can be used to sweet-talk the regulators.
The future of crypto trading?
So, is this where crypto trading is heading, into the arms of the very institutions that decentralised finance once hoped to eradicate?
EDX certainty has the potential to attract sceptical institutional players that have given crypto a wide berth, all the while locking out the retail investing scene.
This is where Binance, Coinbase, Kraken and a dwindling pool of alternative exchanges come in, but the regulatory hurdles they will need to overcome cannot be understated.
Binance saw a stay on execution this week after US District Judge Amy Berman Jackson ordered both entities to come together to sort out their differences.
But this war is far from over.
Proactive has reached out to Fidelity, Citadel and Charles Schwab to discuss the launch of EDX.