Should crypto exchanges be necessary to protect investors from scams?

Over the past few years, scams and frauds have become increasingly prevalent in the crypto space, so much so that losing money to a ‘rug pull’ is almost a rite of gateway for new investors. Most of the time, everyone has stories about getting burned by meme coins or NFTs that promised 100x returns.

After all, it’s easy to be tempted when you read about Dogecoin and Shiba Inu millionaires, but these cryptocurrencies were created as jokes and rallied for no reason.

Soon after, people started exploiting these irrational investing trends. The Squid Game token is perhaps one of the most infamous examples.

On the heels of the hit Netflix show, the token saw a meteoric rise in value – from less than US$1 to over US$2,000 in the space of two weeks. At that point, the creators decided to cash out — or “pull the rug out” — and sell all of their holdings. They walked away with US$3.4 million, while other investors were left with worthless tokens.

Given the lack of regulation in the space, there was no legal recourse these investors could turn to.

Would laws and regulations benefit the crypto space?

“Legal remedies and consumer vigilance go hand in hand to prevent crypto scams from happening on a regular basis,” says Pang Xue Kai, the Singaporean entrepreneur who founded one of Indonesia’s largest crypto exchanges, Tokocrypto.

“We have seen the benefits of both in Indonesia, where crypto trading is permitted under the guidance of the Commodity Futures Trading Regulatory Agency (CFTRA).

Although Indonesia has banned cryptocurrencies as a payment instrument, residents are allowed to invest in them as commercial commodities. The CTFRA has published a list of over 200 cryptocurrencies that can legally be traded in the country.

Along with this, the CFTRA also plans to launch its own Digital Futures Exchange this year.

As such, Indonesia has some of the most comprehensive crypto regulations in the world. These regulations have not deterred investors from participating in the space, and Indonesia ranks seventh in terms of cryptocurrency ownership.

Pang Xue Kai is the founder and CEO of Tokocrypto, one of the largest crypto exchanges in Indonesia / Image credits: Pang Xue Kai

Regulations are not imposed to limit the market, but to prevent the perceived downside risk of unregulated and volatile assets. In fact, regulations can do a lot to improve market liquidity, giving traders greater confidence, prices, transparency, and less volatility.

– Pang Xue Kai, Founder and CEO of Tokocrypto

Pang believes that regulations are not there to restrict access, but rather to create a safe environment for trade. This goes hand in hand with the consumer’s responsibility to protect their interests.

“In an ever-changing market like crypto, staying up-to-date and vigilant is of the utmost importance,” says Pang. “Crypto education plays a key role in safeguarding traders’ interests.”

Should crypto exchanges compensate victims of scams and fraud?

Crypto exchanges also share this responsibility to protect consumer interests. However, as Pang points out, this is not yet a requirement.

Given the current state of regulation, any liability on the part of exchanges to compensate crypto investors who have suffered financial losses as a result of a coin toss is more likely to be moral in nature than legal.

– Pang Xue Kai, Founder and CEO of Tokocrypto

Pang emphasizes the maxim caveat emptor, or “buyer beware,” which has manifested itself in crypto as “do your own research (DYOR).” He believes it is incumbent on investors to be able to identify red flags surrounding questionable assets.

That being said, it would be “gross negligence” if a publicly traded crypto asset turns out to be a rugpull.

“Tokocrypto conducts a thorough review of the crypto assets proposed to be listed on our platform. We ensure that all listed assets are legitimate projects undertaken by owners of good integrity,” he adds.

“The issue of compensating investors who have suffered financial loss – as a result of a coin toss – only arises when an exchange has failed in its standard duty of care to its investors.”

Pang believes the upward trend in crypto insurance will help cover, or at least offset, these losses in the near future. Binance is leading the way in this regard with a user assurance fund that reached a valuation of $1 billion in February.

Beyond verifying their listed assets, Pang also highlights other measures that crypto exchanges must take to protect investors.

“Regular vulnerability assessments and penetration testing (VA/PT) on IT systems should be performed to identify weak spots and disclose clear action plans to strengthen those areas. Improving security measures for end users – for example, enabling multi-factor authentication and end-to-end encryptions – can also help protect customer data and assets.

Should everyone be allowed to invest in cryptocurrency?

In many countries, it is easier for investors to buy cryptocurrencies compared to traditional financial instruments, although the former can often be riskier. This calls into question the need for a higher barrier to entry.

“In Southeast Asia, more than 70% of the adult population is unbanked,” Pang explains. “Many lack the information necessary to meet the Know Your Customer (KYC) requirements that are necessary to invest in traditional financial instruments.”

Pang believes cryptocurrency is driving financial inclusion in these markets.

By raising the barrier to entry, regulators risk limiting financial inclusion in their country. When designing frameworks for cryptocurrencies, it is important for regulators to align compliances with inclusion.

– Pang Xue Kai, Founder and CEO of Tokocrypto

Instead of preventing people from accessing crypto, Pang offers education as a solution. “At Tokocrypto, we launched our Toko Scholar program and Kriptoversity platform in hopes of empowering more crypto enthusiasts through knowledge sharing and support.”

Does cryptocurrency give rise to financial crimes?

Although crypto assets provide a wider population with access to investment opportunities, they also expand the scope for financial crime. NFTs, in particular, have been criticized for being potential vehicles for money laundering.

“Before crypto, international intermediaries were gatekeepers to the global money laundering and terrorist financing (AML/CFT) system,” Pang says. “The very nature of crypto, however, has allowed owners of crypto assets to bypass these gatekeepers, making it the currency of choice for hackers seeking monetary gain.”

singapore monetary authority
The Monetary Authority of Singapore has tightened AML/FT controls for crypto exchanges over the past year / Image credits: Reuters

This is a problem that will be solved over time through government and regulatory efforts.

“Because crypto is still in its infancy, the state of regulation in the crypto space remains complex,” says Pang. “To curb the crypto frenzy of cybercriminals, consistent regulations are needed across the region, to enable traders from different markets to access the same asset class, similar trading mechanisms and ultimately liquidity. .”

Featured Image Credit: Tokocrypto

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