Why Licenses Matter to Crypto Exchanges

By Lily Zhang, Huobi Group CFO

The global cryptocurrency industry is coming under increasing oversight and regulation.

In March, U.S. President Joseph Biden issued an executive order calling for 20 different government departments and regulatory agencies to adopt a comprehensive approach towards cryptocurrency regulation. At the end of June, the European Union proposed a sweeping package of crypto regulations for its 27 member nations, called Markets in Crypto Assets, or MiCA for short.

These measures echo what the IMF wrote in a blog last December, calling for a “comprehensive, consistent and coordinated” regulatory approach to crypto that will achieve its policy goal of maintaining financial stability, while reaping the benefits from crypto’s underlying technological innovations.   

To users and investors, regulations matter because they promote investor protection. These laws reassure users that they can safely park their money on cryptocurrency exchanges and platforms with little or no fear of them being hacked, stolen, or otherwise made unavailable. This is especially the case for larger institutional investors, who professionally manage money for other people and have more at stake.

A Lack of Regulation Limits Crypto Platforms to Small User Bases

To exchanges like us, regulations matter for a number of reasons. For one, many professional and institutional investors simply cannot invest their money through an unregulated exchange due to the regulatory restrictions. And many partners, such as banks, fiat payment channels, and advertising platforms are also prohibited from working with unregulated exchanges.

For example, a commercial bank’s customers cannot directly transfer their money to unregulated exchanges in certain countries, and in other markets, crypto platforms can’t use certain advertising channels such as internet platforms or billboard ads to reach customers.

And yet, many countries around the world have yet to pass legislation stating the criteria to meet to become a regulated exchange, meaning it’s near impossible to become legally compliant in such countries. This limits them to a small base of crypto native users.

For example, in a hypothetical country with a population of 90 million people, perhaps only 10-15 million may have online banking, and of those, only one million may be crypto native users. Without a license, exchanges can only target those one million crypto users who already have crypto wallets. Mass-market advertising falls on deaf ears most of the time, because the vast majority of other users won’t be able to transfer money directly to crypto exchanges. What’s the point of sponsoring a world-renowned soccer team or hiring a celebrity spokesperson if the majority of their fans can’t access your platform?

As a result, competition amongst global exchanges is fierce, and everyone is fighting for that small, but valuable sliver of the pie that is crypto-native users.

New Regulations Make it Imperative for Exchanges to Obtain Licenses

But now things are changing. The passage of comprehensive cryptocurrency regulations makes it imperative for cryptocurrency exchanges around the world to obtain licenses, enabling them to operate in full compliance with the law and reach a wider user base. It also raises the barriers to entry, so that only a limited subset of qualified, trustworthy platforms can provide crypto services to the public.

For example, of the top 60 global crypto exchanges in the 2022 Forbes Crypto Exchange Global Rankings, just 24 are assessed to be highly regulated, with another 19 deemed to be regulated in particular countries or regions. That means just over 70% meet the mark in terms of licensing under Forbes’ ranking methodology, which awards points for each jurisdiction the exchange is regulated.

I’m pleased to share that Huobi Global was ranked seventh by Forbes, which is testament to our market leadership. We earned the highest possible scores not just in regulation, but also in institutional business, products, trading volume, client funds, and cybersecurity – which are among the 10 categories covered by Forbes’ ranking criteria. Notably, Forbes gives regulation double weightage in its methodology, which acknowledges the often-overlooked fact that regulated exchanges bear additional costs to be more accountable to the investing public.  

The highly competitive nature of our industry is why our compliance team is working around the clock to secure compliant registrations and licenses around the world. Over the last few months, we’ve secured registrations in Canada, the U.S., and New Zealand, and we recently obtained provisional approval to offer certain services in Dubai. This latest milestone will enable us to offer both spot trading and OTC services to pre-qualified investors and professional financial service providers in Dubai, which is on track to becoming a major global cryptocurrency hub. This also adds to licenses we had previously obtained in South Korea, Japan, and Gibraltar.

While we welcome increased regulation as the catalyst for the industry’s growth and development, it is hoped that this will be driven by international coordination and also engagement with the industry. As Thomson Reuters noted in its “Cryptos on the rise 2022” report: “An overly restrictive approach could stifle innovation and drive the industry to more welcoming jurisdictions, as the new digital universe is inherently global and borderless.”

Going forward, Huobi Group will continue to pursue licenses and registrations in the countries and regions we operate in, furthering our mission to empower financial freedom worldwide and make crypto accessible for all.

Photo by Kanchanara on Unsplash