Exchanges Are Feeling Pressure From Regulation And Changing Crypto Landscape

Although market volatility is norm for crypto investors and traders, for several years exchanges have enjoyed consistent and stable profitability. The largest and most popular of these trading hubs have reaped tremendous wealth as the blockchain space has continued to mature. Although 2020 looks to be another good year, exchanges are now experiencing pressure from many different points, which will no doubt force them to make major changes if they are to stay relevant long-term. 

Regulatory issues are among the key challenges facing exchanges, and are all but certain to increase in the coming months and years. As the bridge between the crypto and fiat spaces, exchanges are the institutions that can gather and report usage data, which is crucial for authorities to fight criminal activity such as money laundering and tax evasion. Already a host of new rules are being proposed by nations around the world as governments attempt to get a handle on increasing use of blockchain assets. 

Whereas many exchanges are cooperating with governments, doing so is not easy. Maintaining compliance with a myriad of complex and changing regulations is complex and costly. Also, the most common of these, know-your-customer requirements, are unpopular among exchange customers. Enacting them risks alienating users who would rather buy and trade crypto anonymously. These legal burdens are clearly taking their toll. For example, Poloniex has recently closed its doors to American clients, and Binance.us, which was created solely to appease U.S. regulators, has been plagued by lackluster liquidity and use.

The changing technical landscape of the crypto space is also creating competition for traditional exchanges, as wallets and swap services are increasingly moving into the space. It is now possible to easily purchase Bitcoin or Ethereum and trade it within any number of app-based wallets, often at competitive rates. Also, blockchain-based decentralized exchanges continue to press forward, which will open the door to fully anonymous peer-to-peer trading. 

It is also worth noting that banks and legacy investment firms are well on their way to entering the crypto space. With established reputations and millions of current customers, they will be in a position to take an enormous piece of the exchange market. Competing with them will be difficult, to say the least. 

Centralized exchanges thus find themselves in a unique situation where they are enjoying tremendous success, yet their long-term viability is unclear. The larger ones are clearly seeking to transition into fully licensed financial service providers, yet doing so with technology that is, by design, decentralized and borderless is incredibly difficult. These exchanges are presently the most convenient on ramps to purchase blockchain assets, yet as the market matures they will not be needed unless they can create a specific niche that cannot be filled by the competition. Also, even if they can successfully compete, they may end up regulated out of business.

For now, these institutions are flying high, with an ever increasing list of customers and a means to profit regardless of which direction the crypto market takes. Nevertheless, the road ahead for them is becoming increasingly more perilous as blockchain technology enters the mainstream. To remain relevant moving forward they will need to be capable of adapting to the changing demands of the space.