The Failure of Luna Emphasizes the Need of Crypto Exchanges as Gatekeepers

The $40 billion collapse of popular crypto token Luna last week highlights the critical role that exchanges play as gatekeepers, deciding which digital assets are available to ordinary traders.

Due to fierce rivalry among exchanges, the number of tokens accessible on platforms popular with have-a-go investors has risen dramatically.

Last week, however, the risks of listing newer tokens β€” and the lack of regulation surrounding these assets β€” were highlighted when terraUSD, a coin that promised to match the value of the US dollar, became nearly worthless, wiping out the value of its sister token Luna in what research firm CryptoCompare called “the largest destruction of wealth in this amount of time in a single project in crypto’s history.”

Their demise has drawn attention to the criteria that exchanges utilize when deciding whether or not to list a coin. In most jurisdictions, unlike the stock market, regulators play little to no role in monitoring the issuance and trading of tokens.

“I believe the entire industry needs to establish a high threshold when it comes to analyzing whether they list or invest in stablecoins underpinned by things like algorithms,” said Lennix Lai, director of financial markets at OKX, a crypto exchange.

Their demise has drawn attention to the criteria that exchanges utilize when deciding whether or not to list a coin. In most jurisdictions, unlike the stock market, regulators play little to no role in monitoring the issuance and trading of tokens.

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

During the crisis, major exchanges such as Coinbase, Binance, OKX, and Crypto.com, which previously allowed users to acquire Terra or related assets, ceased trading.

Many new crypto investors’ initial stop is at prominent exchanges like Binance and Coinbase, which claim to verify tokens before making them available to their millions of customers.

β€œIt’s true that we are listing more and more assets than we ever have before,” said Paul Grewal, chief legal officer of Coinbase, during an interview in April. β€œAt the same time, there are many, many more assets available for consideration and submitted for consideration than there ever have been before.”

Coinbase, according to Grewal, has rejected “many, many more assets” than it has authorized. Out of 160 assets that applied for consideration, it introduced 24 new assets for trade in March, he said.

According to the most recent data from CryptoCompare, Coinbase listed 164 coins as of April, up from 28 in July 2020. Offshore exchanges such as FTX, Bitfinex, and Binance have a larger selection of coins, although their selection has developed more slowly.

Traders’ eagerness to get their hands on the latest hot token puts pressure on exchanges to offer more assets. The decisions of exchanges have a significant impact on whether tokens gain traction. The price of new Coinbase listings often rises as more traders have access to the tokens, a phenomenon known as the “Coinbase effect” by some observers.

β€œAll 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 the cryptocurrency data company Messari.

According to FTX CEO Sam Bankman-Fried, just about 50 crypto currencies appear to have actual worth. However, most exchanges, including FTX, include hundreds of assets.

Because most jurisdictions have few, if any, regulatory requirements for what crypto tokens can be publicly listed for common people to trade, exchanges play an important role in vetting coins. “You would be held accountable for the things you put on your exchange if you were in a regulated world,” a top executive of a prominent European crypto business stated.

According to James Kaufmann, a partner at law firm Howard Kennedy, stock exchanges have a clear set of listing standards to enforce, whereas crypto marketplaces operate on the “buyer beware” principle.

β€œThe clue is in the name isn’t it: is it a crypto exchange or a stock exchange?” he said.

Changpeng Zhao, the CEO of Binance, has stated that he would want to see regulators give standards on token offerings. But, he noted in a March interview, the world’s largest exchange has so far depended on “crowd intelligence” to pick which coins to list.

“Very often, the audience is a better judge than we are,” Zhao remarked, adding that the amount of users a coin has is the most crucial factor in determining whether or not it will be listed on Binance. Binance noted in a blog post about its listing process that it also performs “rigorous due diligence” on tokens.

Gemini, the billionaire Winklevoss twins’ exchange, said it sought to sell digital assets requested by users while also attempting to protect them from hazardous tokens.

β€œIf we think there’s a genuine threat to our customer funds being at risk, then we would not move forward,” said Brian Kim Johnson, general manager of the Crypto Core team at Gemini.

Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.