By Transparency, despite being the main value proposition in blockchain, is sometimes lacking in this space. Bearing the brunt are traders and institutions executing their trades via slippery cryptocurrency exchanges. Aware of the situation on the ground, and how impactful it can be in their drive for full compliance, the chairman of South Korea’s Financial Services Commission (FSC), Sungsoo Eun announced that he would be supporting the introduction of a cryptocurrency exchange reporting system that is currently under discussion in the National Assembly. This proposal is part of a report that legislators will discuss as they make amends to the Special Financial Information Act.
On one end, it has been acknowledged that blockchain as a disruptive technology is here to stay. However, considering the level of fragmentation and disparate regulations, there are elements that are gaming the system and, in the end, tainting the novel tech. While applications are literally infinite, exchanges, regardless of architecture, are critical enablers acting as liquidity channels and facilitating seamless exchange of digital assets.
South Korea’s Reporting System Will Attract Institutional Investors
By introducing a reporting system in the country, Sungsoo is of the view that the industry would be attractive to institutional grade investors. On the other end, it would also lift the burden off law enforcers, eliminate senseless speculation of digital assets and most importantly, lay the foundation that will eventually limit money laundering, a vice that regulators insist is rampant in cryptocurrency circles.
Aptly demonstrated by Bitfinex and Quadriga CX, and made worse by recent security lapses that not only led to crippling losses but dented the reputation of affected exchanges, the insistence of transparency is indeed a cardinal issue that needs immediate addressing. To foster trust going forward, enforcing transparency measures will demand cryptocurrency exchanges to proof their solvency as custodians of user funds. This disclosure is paramount as it would be important for a trader or investor to know the risks. Additionally, it would be appropriate that these exchanges proof whether their volumes are irrefutably legitimate.
Clarifying, previous reports indicated that most cryptocurrency exchanges deliberately inflated and faked their trading volumes through wash trading. Notwithstanding, there are hitches around this. For example, most ramps are against publicly disclosing financial details touching on their internal operations. Good news is that there are advances around this.
Transparency Efforts
Although still a work in progress, Blockstream’s standard tool called Proof-of-Reserves allows an exchange to cheaply and easily prove their BTC reserves without generating extra inputs out of their total reserve. Other advances geared toward proving the level of solvency include Arpa’s secure multi-party computation which can be applied to several cryptocurrency exchanges.
Given the advocacy and the community’s effort towards complete transparency especially on matters trading volumes, CoinMarketCap, which was adversely mentioned by the blockbuster Bitwise report and accused of supporting exchanges where irrefutable evidence showed that they were volume manipulators, in June announced that up-to 70 percent have complied with their transparency drive dubbed, the Data Accountability & Transparency Alliance (DATA) initiative. Carylyne Chan, global head of marketing at CoinMarketCap, said:
“We are highly encouraged after seeing strong support for our DATA initiative so far. With these submitted data points, we aim to provide more meaningful analyses and metrics for our users, and empower them with information to do their own research even more effectively.”
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