Cryptocurrency Exchanges

It seems that crypto exchanges have two major problems - transparency and liquidity. In a letter sent to 13 cryptocurrency exchanges, New York Attorney General, Eric Schneiderman addressed transparency when he requested that information be provided on a number of topics. While acknowledging that cryptocurrencies represent investment opportunities, technological advances and are inspiring for entrepreneurs, investors and innovators, Schneiderman also called cryptocurrency “highly speculative.” Further, noted Schneiderman, virtual currencies bring risk, instability and volatility in addition to innovation and opportunity.

New York Attorney General Pushes for Transparency in Crypto Exchanges

Each letter sent by Schneiderman contained a 34-point in-depth questionnaire regarding specific policies related to insurance, trading and banking relationships. Schneiderman’s push for transparency is a key component to the Virtual Market Integrity Initiative which is meant to protect investors while preserving the integrity of cryptocurrency markets. The regulatory frameworks for businesses involved in cryptocurrency is already fairly stringent in New York - these businesses are required to obtain a “BitLicense” from the NYDFS prior to operating in the state.

Liquidity or Lack Thereof

Lack of liquidity, the ability or lack thereof, of a market to allow assets to be bought and sold at stable prices, is another major issue associated with cryptocurrencies. Cryptocurrencies are not nearly as liquid as, for example, the US Dollar. Markets can easily absorb multi-million-dollar transactions without affecting the value of the dollar. Bitcoin, however, with a finite amount that will never cross 21 million, the supply is very controlled and not always available for trading through one exchange in large amounts. For an exchange to do high volumes it must possess and maintain sufficient liquidity on the products being traded within it. That is not always the case with Bitcoin and altcoins.

Cryptocurrency Traders Unhappy with Liquidity in Crypto Exchanges

A recent survey of cryptocurrency traders found that more than a third are not happy with the problem of liquidity on prevailing exchanges. To counter the liquidity problems, cryptocurrencies will need to be promising enough to attract those investors who are able to actively participate in trading. Further, each provider of crypto exchanges must fully research to determine which coins should be added to the listings. In other words, the future of the coin must be thoroughly evaluated prior to being added to the exchange.

Blockstream and ICE Data Services Working to Provide “Depth Data” for Investors

ICE Data Services, along with Blockstream, a leading provider of blockchain technologies, is working to provide “depth data” regarding the liquidity of individual crypto exchanges. Blockstream standardizes data received from various venues, sorts according to timestamps, then converts to FIX messages (the leading finance industry standard for machine-readable trade messaging). This allows traders to easily locate discrepancies in price among crypto exchanges. Because it is currently difficult for investors to engage in price discovery, Blockstream is bringing a welcome service to cryptocurrency traders.

Virtual Commodity Association Working Group - Bittrex, bitFlyer USA, and Bitstamp Join Gemini to Develop New Industry Standards

The main goal of the Virtual Commodity Association Working Group, founded by Gemini founders Cameron and Tyler Winklevoss is to present rules, norms and regulations for the cryptocurrency and blockchain industry as well as to develop new regulatory standards for the cryptocurrency exchange space.

“Foster financially sound, responsible, and innovative virtual commodity markets through a system of industry sponsored standards, sound practices, and oversight that promotes price discovery, efficiency, and transparency…Incentivize the detection and deterrence of manipulative and fraudulent acts and practices, including partnering with regulators and particularly the CFTC to share or refer information, as appropriate.” Cameron Winklevoss

Meanwhile in Canada…

I talked to Omar Abbas, Co-Founder and Chief Investment Officer of the National Digital Asset Exchange Inc. (NDAX.IO), a Canadian-based digital asset exchange about these issues and here’s what Omar had to say…



Does the cryptocurrency market have a liquidity problem?

In the case of cryptocurrency, one important aspect of liquidity is the ability to be converted into fiat, on demand, without any difficulty. Today, there is a strong network of trusted exchanges globally - which is a key component to determining levels of cryptocurrency liquidity. When bitcoin was introduced in 2009, it initially had little no to value. At the time of writing this, Bitcoin’s market cap is around USD$110B and is one the best performing assets over the past decade. Bitcoin is significantly gaining momentum as both, a store of value and an accepted method of payment.

With that said, however, bitcoin has yet to be fully embraced by banks, institutions and government regulators. Even though bitcoin is a major asset class, a number of governments have chosen not support it - negatively impacting its liquidity. Most major banks, particularly in North America, will not open a bank account for companies that are in anyway associated with bitcoin or any cryptocurrency.



What can exchanges do to improve liquidity?

Integrating within the banking system will significantly improve the speed, security and affordability of getting your money in and out of crypto - factors which increase trading volume and ultimately liquidity. A key aspect of earning the trust and relationship of banks is for exchanges to implement a robust compliance regime that complies with Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

How much responsibility should fall on an exchange in regards to the altcoins it lists?

When choosing to list a coin on an exchange, it’s important to consider the following risk management factors:



Market Capitalization: Liquidity is a very important quality when choosing to list a coin/token. Generally, we list coins with a minimum market cap of $500M. It ensures there’s a large enough demand for that particular asset and minimizes the risk of selling at a discount.

Security: An assessment of technology security is performed, including a robust bug bounty program and track record of improving their source code after vulnerability is disclosed, and a security audit conducted by a third party.

Regulation: As a registered as a Money Services Business (MSB), the listed coin cannot affect our ability to meet FINTRAC’s compliance obligations, including Anti-Money Laundering (AML) and Counter-Terrorist Financing procedures.

Utility: There should be utility associated with purchasing, holding or spending the coin/token. The founding team and executive leadership should be able to clearly articulate its business operations, strategy and vision, and offer compelling reasons why the digital asset should exist. Assuming this information is publicly available, NDAX also applies KYC requirements to founders and/or leaders.

What steps has NDAX.IO taken to protect investors?



Canadian Banking: NDAX is fully integrated into the Canadian banking system, ensuring client deposits stay in Canada and allows users to instantly fund their account in the most secure, efficient and compliant manner.

Regulatory Framework: We are a licensed Money Services Business (MSB) with FINTRAC - Canada’s financial intelligence unit. We’ve strictly enforced an Anti-Money Laundering (AML) and counter-terrorist financing compliance regime that meets all the requirements of applicable laws and regulations.

Hot Wallet Insurance: NDAX holds approximately 2% of customer funds in hot wallet storage (online) and the remaining 98% is stored in cold storage (offline). All digital assets that are stored online are fully insured. This means that if we experience a security breach of our online assets, our insurance policy will cover the loss of any client assets.

Institutional Grade Security: We implement extreme security measures when it comes to offline storage. We hold cryptocurrency in various safety deposit vaults across the globe - completely disconnected from the internet. In addition, we enforce 2-Factor Authorization (“2-FA”) for users, adding an additional layer of security.

NDAX.IO currently offers 5 coins on the exchange. Any plans to increase that number in the near future?

We currently offer the following 5 coins: Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Bitcoin Cash (BCH) and Ripple (XRP). We are planning to add Stellar and NEO in the near future as part of our official launch. We are also looking at adding EOS and DASH. We plan on adding a new cryptocurrency on a quarterly basis.

Any tips to give investors in regards to cryptocurrency trading?

Diversification: As the saying goes, don’t put all your eggs in one basket. Cryptocurrency should be treated as its own asset class. To minimize the risk of being exposed to a single market, your portfolio should be well diversified and maintain an allocation to different asset classes.

Interesting Times

2018 has definitely been an interesting year in the crypto market. As of this writing cryptocurrency is in a bear market - one for the record books many report. Some analysts predict a bear market for months to come while others are predicting a strong rebound for the top cryptocurrencies. Either way, we are in interesting times.

“May you always live in interesting times.” - Chinese Curse

Audrey Nesbitt

Check out my BlockDelta profile for full contact details.