Popular crypto token Luna’s $40 billion plunge last week underscores the crucial role exchanges play as gatekeepers that decide which digital assets are easily accessible to mainstream traders.
Fierce competition between exchanges has led to a sharp increase in the number of tokens available on platforms popular with investors.
But the risks of listing new tokens – and the lack of regulation around these assets – became apparent last week when terraUSD, a coin that promised to match the value of the US dollar, became nearly worthless and also the value of its sister Tokens wiped out Luna in what research firm CryptoCompare called “the largest destruction of fortunes in a single project in crypto history to date.”
Their collapse has drawn attention to the standards exchanges use when deciding to list a coin. Unlike the stock market, regulators in most jurisdictions play little to no role in overseeing the issuance and trading of tokens.
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“I think the entire industry needs to set a high bar when it comes to evaluating whether to list stablecoins or invest in stablecoins that are backed by things like algorithms,” said Lennix Lai, director of financial markets at OKX, a crypto -stock market
Major exchanges, including Coinbase, Binance, OKX and Crypto.com, which previously allowed their customers to buy Terra or linked tokens, halted trading during the crisis.
The first port of call for many crypto newbies are mainstream exchanges like Binance and Coinbase, who say they vet tokens before making them available to their millions of users.
“It’s true that we’re listing more and more assets than ever before,” Paul Grewal, Coinbase’s chief legal officer, said during an interview in April. “At the same time, far, far more assets are available for consideration and are being submitted for consideration than ever before.”
Grewal said Coinbase rejected “many, many more assets” than it approved. In March, it added 24 new assets to trading, out of 160 requested for consideration, he said.
Overall, Coinbase listed 164 coins in April, up from 28 in July 2020, according to the latest data from CryptoCompare. Offshore exchanges FTX, Bitfinex, and Binance list more, but their coin inventory has been growing at a slower pace.
Traders’ excitement to access the latest popular tokens is putting pressure on exchanges to list more assets. Exchange decisions also have a major impact on which tokens gain traction. New listings on Coinbase often rise in price as more traders gain access to the tokens, a pattern some analysts have dubbed the “Coinbase Effect.”
“All of a sudden, when you list a token on an exchange like Coinbase, there’s this massive influx of liquidity,” said Roberto Talamas, a researcher at Messari, a cryptocurrency data company.
FTX CEO Sam Bankman-Fried said that only 50 cryptocoins appear to have any real value. But most exchanges, including FTX, list several hundred assets.
Most jurisdictions have little or no legal standards for what crypto tokens can be publicly listed for trading by ordinary people, so exchanges play a key role in coin scrutiny. “If you were in a regulated world, you would be held accountable for the products you list on your exchange,” said an executive at a major European crypto group.
James Kaufmann, a partner at law firm Howard Kennedy, said the regulation provides exchanges with a clear set of listing criteria to enforce while crypto markets operate on a “buyer caution” basis.
“The clue is in the name, isn’t it: is it a crypto exchange or an exchange?” he said.
Binance CEO Changpeng Zhao said he would like regulators to provide guidelines for token listings. So far, however, 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 ourselves,” Zhao said, adding that the number of users of a coin is the most important criterion for whether Binance will list it. In a blog post on its listing regime, Binance said it also subjects tokens to “rigorous due diligence.”
Gemini, the exchange owned by the billionaire Winklevoss twins, said it aims to list the digital assets customers demand but also tries to protect its customers from dangerous tokens.
“If we felt our client funds were at serious risk, we would not proceed,” said Brian Kim Johnson, general manager of the crypto core team at Gemini.
The scrutiny of what standards exchanges are using when deciding to list a coin comes as the strategy of adding more coins to spur growth is showing signs of failure.
Buying and selling smaller tokens helped increase trading volume on Coinbase by 7x over the past year. However, trading in what the exchange calls “other crypto” fell by more than half in the first quarter, compared to 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 did not suffer similarly large declines in trading.
Coinbase CEO Brian Armstrong said last month 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 consumer protections in crypto,” he said.
Additional reporting by Scott Chipolina
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