Establishing a crypto exchange has become one of the profitable businesses in recent times. However, there are some associated risks that traders must know before investing their money in exchange.
Let us know more about these unscrupulous practices
Pump and dump schemes - Since the crypto space is still highly unregulated, many exchange owners are involved in pump and dump schemes. By controlling a majority of the supply of tokens, the projects undertaken by the owners collude with the exchanges, they force the token price to multiply abnormally by two, three or even ten times in a matter of a few months. This is usually done by firms with a very low market capitalization.
Establishing FOMO among the community - FOMO stands for Fear of Missing out. It is done by creating fake member accounts to share the news of a price pump among the interested community in a project. This will fetch the projects a healthy profit as exchanges will sell the tokens at high prices to the users who have no chance but to buy at the price charged without any negotiation. The traders must watch out for the trading volume of the token, whether the current price is being maintained by the exchange for a long time for the token, the use-cases and the demand for the token to avoid becoming a victim of FOMO. It is better to trade tokens that have a high trading volume spread out evenly across a few exchanges. In such cases, chances of price manipulation are low as a price pump done on one exchange will be brought down to the prevailing market price immediately safeguarding your interests as a retail investor.
Indulging in the massive distribution of freebies during the campaign - It involves giving away huge numbers of Bitcoins or altcoins for free to the users as a reward. However, lots of forgeries can happen as exchanges can create fake email addresses and photoshop the photos of the winners receiving the prizes. It is better not to participate in such contests held by the exchanges to avoid getting manipulated or tricked.
Focussing on the compliance issues faced by the crypto exchanges
The FATF (Financial Action Task Force) has prepared a detailed report covering around 200 countries regarding the AML (Anti Money Laundering) standards needed to be followed by the virtual asset service providers (VASP). However, many nations are yet to comply with the norms regarding domestic legislation. The watchdog’s main aim is to undertake a comprehensive risk assessment related to digital assets. Due to the economic downturn, many professional money launderers have turned to crypto as it is highly unregulated and ensures anonymity. They are also closely watching the growth of peer to peer transactions which are rendering the role of intermediaries as useless.
They have formulated a travel rule where exchanges should transmit details to FATF on the identity of the originator and the beneficiary of the funds for every transaction exceeding $1000. A second review will be conducted in June 2021 to ensure a sustainable regulation of the industry. Hence, the industry has to take concrete steps for the full implementation of the Travel rule before the start of the next year.
However, a few crypto companies have complained that the FATF’s report is not conducive for developing a coherent cross-border regulatory environment. It is conflicting with the AML rules and data protection with differences in the US and the GDPR (General Data Protection Regulation) of the European Union (EU).
This leads to VASP’s needing to be extremely careful regarding the customers they target for their business as they may fall under the radar of regulatory regimes. But, despite concerns, the FATF’s recommendations will lead to greater transparency in international monetary flows.
More clarity is needed regarding the regulation of digital securities, stablecoins, P2P transactions, and automated smart contract transactions. Many exchanges, however, are technically not prepared to comply with the travel rule. The latest technologies such as Artificial Intelligence and Machine Learning can be utilized on top of the blockchain networks for regulators to effectively monitor all the transactions being executed within their operations jurisdictions.
There is a need for a common global framework that is applicable for every jurisdiction with immense interoperability.
International coordination in information sharing and technical infrastructure is also needed especially concerning the operations of VASP’s. VASP covers the likes of crypto exchanges, peer to peer services, wallet providers and custodians and other digital asset traders.
The impact of FATF’s recommendations on VASP’s
Every VASP must immediately assess their existing AML regulations and update its policies and operating procedures based on the FATF’s suggestions. They must begin a formal evaluation of the travel rule solutions proposed by the FATF. They should finalize the preparations for licensing, obtaining supplementary legal advice along with an independent assessment of their current system. After fixing the gaps in the existing AML framework, they have to assign responsibility to people to deal with sanctions. The travel rule solutions must be suited to the operations of the business before beginning the implementation process.
Despite FATF taking steps to regulate the crypto industry and bring it out of a dark shadow, many member countries bypass their recommendations by passing their own legislation. Since they do not comply with the guidelines, their names get featured in FATF’s blacklist making them radioactive to foreign investment. This will enable the growing business of Cryptocurrency exchange development to avoid funding illicit causes and transfer funds securely without any suspicion.
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