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The World Federation of Exchanges (WFE) sees the potential for crypto-asset trading platforms (CTPs) to play a larger role in the “real” economy and society at large. It had some blunt observations about CTPs and suggestions for regulators in a paper released Sept. 28.

“CTPs should welcome a degree of regulation as a mean[s] to bolster the appeal of their markets,” the WFE wrote. It suggested six principles for regulating CTPs. The first of those was to segregate functions to avoid trading against their customers, a complaint that United States Securities and Exchange Commission chairman Gary Gensler often voices. Until they meet those standards, CTPs should not call themselves exchanges, the trade association said. 

Principles for exchanges to live by, according to the WFE. Source: WFE

The WFE was concerned about the integration of distributed ledger technology (DLT) into the TradFi exchanges it represents. Regulators should consider the mutual advantages of that integration, it said:

“If you make it impossible for regulated institutions to run services in crypto-assets, you effectively chase this business out of the institutions who know how to run it properly, and into the shadows, where it may be run by new entrants with limited experience.”

FTX experienced a “classic financial services collapse” that was not related to the crypto industry itself, the WFE said.

Related: 40% of crypto trading platforms are decentralized: World Federation of Exchanges

It had much to say about decentralized finance (DeFi):

“DeFi appears to operate differently [from TradFi and CeFi] but the differences are not quite as stark as they seem. […] A platform where buyers and sellers meet is, by its very nature, a central entity.”

For example, the Ethereum Merge – its transition from proof-of-work to proof-of-stake consensus – “was largely driven by the centralised team at the Ethereum foundation.” Regulation could be applied on the level of DApps, not the protocol, the WFE suggested.

The WFE applauded Financial Action Task Force efforts to apply Know Your Customer regulations, the so-called travel rule, to crypto and endorsed the IOSCO Principles for Secondary and Other Markets to raise standards on crypto markets.

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