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PRIMER: regulating cryptocurrency exchanges

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Exchanges have been blighted with negative publicity recently, but improvements have been made in recent years. Here crypto firms and lawyers explain the back story

It seems there has been nothing but bad news for cryptocurrency exchanges recently.

Amid the price collapse, a number of high-profile incidents have cast further doubt on the stability of the market. Most notably, the death of Gerry Cotton, chief executive of Canadian exchange QuadrigaCX, which allegedly resulted in $145 million of investors’ money being frozen in inaccessible cold wallets. Conspiracy theories have naturally followed.

This isn’t the only case to concern potential investors. In 2014 Mt. Gox, one of the first bitcoin exchanges, shut down its operations and filed for bankruptcy. At the time, the exchange handled 70% of all bitcoin transactions, and investors are still unclear as to the state of their investment.

The plethora of hacks on exchanges around the world has had a big impact on prices, contributing to bitcoin’s collapse. Its price is now down from $19,700 in December 2017 to $2,867 at the time of writing. In September 2018, Japanese exchange Zaif was infiltrated by hackers who stole almost $60 million worth of cryptocurrency.

These high-profile incidents have led many to believe that new cryptocurrency-specific regulation is required. It is said that doing so would help protect retail investors, as well as drive out some of the less scrupulous market players.

“Regulation defining minimum standards of risk management framework would address cyber risks and information security,” said a vice president at a regtech firm. “Doing so is important to mitigate operational risks and enhance customer protection.”

See also: Coinbase CEO says crypto-specific regulation is necessary

What is regulators’ current position?

Cryptocurrency exchanges are a digital marketplace where users can trade digital cryptocurrencies. 

One of the major difficulties for regulators is defining precisely what cryptocurrencies are,...