Luna’s Collapse Highlights the Role of Crypto Exchanges as Gatekeepers


Last week’s $40 billion collapse of popular crypto token Luna underscores the crucial role that exchanges play as gatekeepers that determine which digital assets are readily available to traditional traders.

Fierce competition between exchanges has led to a surge in the number of tokens available on popular platforms to sophisticated investors.

But the risks of listing new tokens — and the lack of regulation around those assets — were highlighted last week when terraUSD, a coin that promised to match the value of the U.S. dollar, went nearly zero. value, also clearing the value of its sibling token. Luna, in what research firm CryptoCompare called “the biggest wealth destruction in this time frame in a single project in crypto history.”

Their meltdowns have drawn attention to the standards that exchanges apply when deciding to list a coin. Unlike the stock market, regulators play little or no role in overseeing the issuance and trading of tokens in most jurisdictions.

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“I think the whole industry needs to set the bar high when it comes to evaluating whether they are listing or investing in stablecoins that are backed by things like algorithms,” Lennix Lai said. , director of financial markets at OKX, a crypto exchange.

Major exchanges including Coinbase, Binance, OKX and, which previously allowed their customers to buy Terra or related tokens, halted trading during the crisis.

The first port of call for many newbie crypto investors are traditional exchanges such as Binance and Coinbase which say they vet tokens before they are made available to their millions of users.

“It’s true that we’re listing more and more assets than we’ve ever had before,” Coinbase chief legal officer Paul Grewal said in an April interview. “At the same time, there are many, many more assets available for scrutiny and subject to scrutiny than ever before.”

Line chart of $ per coin showing Luna falling back to Earth

Grewal said Coinbase has rejected “significantly more assets” than it has approved. In March, it added 24 new assets to trade out of 160 that requested consideration, it said.

In total, Coinbase listed 164 coins in April, up from 28 in July 2020, according to the most recent data from CryptoCompare. Offshore exchanges FTX, Bitfinex, and Binance list more, but their stable of coins has grown more slowly.

Trader enthusiasm for accessing the latest popular token is putting pressure on exchanges to list more assets. The decisions of the exchanges also exert a huge influence on which tokens are gaining ground. New listings on Coinbase often skyrocket as more merchants gain access to the tokens, a pattern some analysts have called the “Coinbase Effect.”

“All of a sudden there’s this massive influx of liquidity when you list a token on an exchange like Coinbase,” said Roberto Talamas, a researcher at cryptocurrency data firm Messari.

FTX Managing Director Sam Bankman-Fried said that only 50 crypto coins appear to have any real value. But most exchanges, including FTX, list several hundred assets.

Most jurisdictions have little to no legal standards on crypto tokens that can be listed on exchanges for ordinary people to trade, so exchanges play a key role in reviewing coins. “If you were in a regulated world, you would be held accountable for the products you put on your exchange,” said a senior executive at a major European crypto group.

Volume column chart ($ billions) showing trading volume in smaller tokens falters at Coinbase

James Kaufmann, a partner at law firm Howard Kennedy, said the regulations provide exchanges with a clear set of listing criteria to apply, while crypto markets operate on a “buyer beware” basis. .

“The clue is in the name, isn’t it: is it a crypto exchange or a stock exchange?” he said.

Binance CEO Changpeng Zhao said he would like to see regulators provide guidance on token listings. But until now, the world’s largest exchange has relied on “crowd intelligence” to decide which coins to list, he said in an interview in March.

“Very often the crowd is a better judge than us,” Zhao said, adding that a coin’s number of users is the most important criteria for whether Binance will list it. In a blog post about its listing regime, Binance said it also subjects tokens to “rigorous due diligence.”

Gemini, the exchange owned by the Winklevoss billionaire twins, said it aims to list digital assets in demand by customers, but also tries to protect its customers from unsafe tokens.

“If we believe there is a real threat to our clients’ funds, we will not proceed,” said Brian Kim Johnson, managing director of the Crypto Core team at Gemini.

The scrutiny of standards exchanges that apply when deciding to list a coin comes as the strategy of adding more coins to drive growth shows signs of running out of steam.

Buying and selling smaller tokens helped increase trading volume on Coinbase sevenfold last year. However, trade in what the exchange calls “other cryptos” fell by more than half in the first quarter, from more than $370 billion in the last three months of last year, according to calculations by the Financial. Times. The category includes tokens other than bitcoin and ether, which have not suffered such significant declines in exchanges.

Coinbase CEO Brian Armstrong said last month that the platform plans to create a system for users to rate and review new digital assets, similar to product reviews on Airbnb or Amazon. Coinbase believes the system can “help create additional protections for crypto consumers,” he said.

Additional reporting by Scott Chipolina

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