Exploring the Market Control of Cryptocurrency Exchanges

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During 2018 and part of 2019, many ‘revolutionary’ crypto projects failed to keep their promises and consequently, cryptocurrency exchanges decided to delist tokens that lacked liquidity, usage or had problems with laws and regulations. Financemagnates published an analysis of the causes and consequences of this phenomenon, October 2nd, and here is our take.

Exchanges in Control

During 2017, the bull run euphoria brought tens of thousands of new users to the cryptocurrency market. These individuals were attracted mainly by the growing hype around high-return initial coin offerings (ICOs) and other myths of unfathomable riches. Though once the market crashed, the attention turned to blockchain technology.

Cryptocurrency exchanges took advantage of this moment of hype to ask crypto and blockchain projects to pay significant sums of money to list their tokens and enable investors to trade their cryptocurrencies, a fee that could go as high as $15 million dollars, which is a ridiculous amount of money.

During 2017, however, these sums were easily payable by the various projects that, thanks to an ICO, could raise more than $100 million dollars. Though these payouts to exchanges were without prudent thought, considering that exchanges are a fundamental element for the development of a project as it allowed the exchange of the token in periods subsequent to fundraising.

This need, however, turned out to be a weakness.

The euphoria quickly faded in 2018 with the arrival of the crypto winter. Declining prices, declining interest, and declining trading volume cast all the ‘revolutionary’ projects into the shadows with no way out.

Considering present volumes, according to CoinMarketCap, there are only about sixty cryptocurrencies that generate a volume of more than $10 million dollars (USD) in 24 hours, out of a total of more than 2900 registered assets, a fact which speaks for itself.

As a consequence, in some cases, cryptocurrency exchanges decided to delist the trading pairs that lacked liquidity. For example, on September 30, Binance announced that it would be delisting thirty trading pairs which also included a few tokens that were launched from the Binance Launchpad. According to the announcement, the decision was made to improve liquidity and user trading experience.

The same thing happened to 23 trading pairs on Poloniex.

This decision, although not as drastic as dropping an asset entirely, could certainly have some consequences on the tokens’ price as part of its liquidity would be reduced.

However, these decisions are not always taken solely based on professional choices.

This is the case for the Bitcoin Gold (BTG) development team who received real threats from the popular exchange Bittrex to stay listed. As published by the BTG development team, Bittrex informed them that they made this decision because the BTG team would not pay 12,372 BTG to Bittrex to cover the loss they incurred after the double-spend attack occurred on May 19.

Another case is that of UnikoinGold, which was threatened to be delisted if it had not artificially manipulated its trading volume.

Regulatory Pressure Played a Part

Another more rational reason to delist a cryptocurrency is due to regulatory pressure in various jurisdictions around the globe. The United States of America is perhaps the nation that, during 2019, has strengthened the controls for digital assets.

As a consequence, in order to avoid SEC trouble, Poloniex announced the halt for nine altcoins in the U.S. markets from May 29, 2019, while Binance completely shut down the operation on United States’ territory. The latter’s decision, however, was only temporary to prepare the exchange to open a new branch dedicated solely to the U.S. market.

In Asia, instead, the regulators’ alarm focused mainly on privacy tokens like Dash and Monero. In order to respect guidelines dictated by the Financial Action Task Force (FATF), the intergovernmental organization which prevents money laundering, OKEx and Upbit have decided to delist the main privacy tokens.

Wrathful Exchanges

The most discussed delisting case of the year certainly concerns Bitcoin SV.

The first exchange to have announced the delisting was Binance and, although the official announcement states that the decision had been taken during the periodic reviews of the listed tokens in terms of commitment to projects, communication, quality level and response to requests from two diligence and information, the real reasons for the delisting seemed more personal than professional.

The problems began in April 2019, when Craig Wright sued various individuals who denied that he was Satoshi Nakamoto. The accusations were not to the liking of the CEO of Binance, Changpeng Zhao, who immediately decided to take measures in this regard.

His action, however, triggered the reaction of numerous exchanges that decided to delist Bitcoin SV from their platform causing serious consequences for the coin in the short term which lost 6% in a few minutes as soon as the news was made public. The interesting thing is that even the crypto twitter community was mostly in agreement with the decision, with experts like Anthony Pompliano publicly inviting other exchanges to remove the virtual currency from their platforms.

Censorship or Caution?

This act of delisting has spurred further controversy and debate around the crypto community.

Some are claiming this delisting amounts to censorship by a cartel of exchanges, and others are arguing that delisting BSV actually harms those exchanges’ customers. In response, exchanges state that the delisting always takes place according to the regular controls they make over the tokens listed on their platforms in order to guarantee the best trading experience for the customers.

The argument of censorship could stand if these platforms were public. However, all of these services are provided by private companies that can set any barriers to their services, and keep full control over clients once registered. Exchanges are curators of sorts, and they’re free to list or delist any asset they please. These are not permissionless, uncontrollable networks; there’s a centralized entity behind each one of them.

Although this philosophy is contrary to the original principles of cryptocurrencies, this is the reality and there is nothing that can prevent it. Instead, we should ask ourselves whether most cryptocurrencies are useful or not. In fact, many of these projects fear being delisted because, without the exchanges, their token would be completely useless and forgotten.
If the use of a cryptocurrency depends exclusively on an exchange, then the project should be considered as failed.
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