Transformations in crypto exchanges and traditional institutions, Sept. 18-25


Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law.

Editor’s note

The final scene of Animal Farm, Orwell’s classic fable of revolution gone wrong and a staple of secondary-school reading lists throughout the English-speaking world, features a card game. The pigs who run the farm with an iron hoof host the humans who have gone from enemies of the revolution to drinking buddies of the revolution’s leaders. The book ends with accusations of cheating and a metamorphosis realized. The pigs and the men look just the same.

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If you squint, everything starts to look like your favorite fables. Within crypto, there is a strain of revolutionary talk that dogmatically opposes moves towards compromise and negotiation with the forces governing traditional finance. Crypto shouldn’t risk that contamination, goes the line of thinking.

Centralized cryptocurrency exchanges operating in highly regulated jurisdictions take a lot of flack from crypto’s revolutionary side while also tolerating a lot of red tape and long boring meetings from regulators. Different tokens behave in radically different ways, and even the O.G. Bitcoin can function as a currency, a store of value and a speculative investment depending on how you’re looking at it. And unlike more decentralized ways of moving crypto around, exchanges have to deal with how regulators are looking at crypto on a given day or in a given jurisdiction.

Consequently, crypto exchanges have to face convoluted taxonomies. Are they animal, vegetable or mineral? Are they payments processors? Banks? Traditional exchanges — but even then, of the commodity or security variety? While regulators and legal teams hack away at the thicket of possible registration requirements, the exchanges are still subject to special paranoia regarding money laundering and terrorism financing controls. And the truth is, exchanges are kind of a chimera, and that’s before getting around to the conversation about DeFi.

Despite these challenges, we’re witnessing a pretty radical metamorphosis. Crypto exchanges and their more traditional financial analogues are getting ever-greater license to act like each other. And, funnily enough, this week began with bombshell news about long-standing AML failures at the world’s most prestigious banks, who facilitated cheating at 12-figure games.

Kollen Post, Policy Editor, @the_postman_