Status: 03.01.2023 08:20
The trading of Bitcoin, Ethereum and Co. is largely unregulated. Financial market expert Jan Pieter Krahnen explains why more control would be important – and what potential there is in cryptocurrencies.
tagesschau.de: Mr. Krahnen, how does trading with crypto exchanges actually work? How can I imagine this as a new investor?
Jan Pieter Krahnen: Crypto exchanges are businesses that bring together the supply and demand of and for cryptocurrencies in one place and continuously determine the trading prices. Although these companies are called stock exchanges, unlike regular stock exchanges, they are not subject to financial supervision.
They can therefore be described as part of the so-called shadow banking system. This means that the conditions under which trading takes place are not controlled by a third party: who can participate in trading, how are prices determined, how does settlement take place and what are the requirements for trading. stock exchange operator? All these regulations are optional and they are not framed.
To no one
Jan Pieter Krahnen is founding director em. of the Leibniz Institute for Financial Market Research SAFE and Emeritus Professor of Banking and Finance at Goethe University Frankfurt. His research focuses on functional issues of the European financial market order, in particular banking and capital market supervision, green transformation and challenges for financial stability.
tagesschau.de: A major issue that concerns authorities around the world is regulation. Are regulations limiting crypto exchanges and investors, or is regulation necessary for the growth of this industry?
cranes: Without regulation, the crypto industry can be like the proverbial Wild West. Because product and exchange offers can be created with fraudulent intent without this having to be noticed immediately. There are no clear rules controlled by independent specialized institutions such as a financial regulator. It is therefore not surprising that the scammers who settle in this sector are often not recognized until too late.
State regulation, on the other hand, would allow investors to have much more confidence in the products and commercial structures offered to them. Presumably, a regulated crypto financial market might be of greater importance – it would be promoted.
The crypto industry can then be much more integrated into traditional financial markets than it is today. In fact, cryptocurrencies such as bitcoin are now purely private enterprises with no reliable control structure. Politicians must now think carefully about whether they want to regulate this world comprehensively – and thus make it presentable to some degree.
How serious is it?
tagesschau.de: Key word: where there is a lot of money, fraudsters are usually not far away. As an investor, how do you recognize reputable crypto exchanges?
cranes: In my opinion, reputable crypto exchanges will only exist if their ways of working are transparent and continuously monitored by an independent party – i.e. they are subject to an external monitoring architecture such as we know thanks to regular exchanges.
It would also mean that the actors involved would have to respect certain rules such as transparency and capital rules. The requirements imposed today on banks and other financial institutions would then also apply to the crypto sector.
“Major Disclosure and Control Issues”
tagesschau.de: Again and again you hear about hacked crypto exchanges. Is my money safe there?
cranes: A crypto exchange is not only insecure when hacked, but also due to its own mode of operation. Where is the customer’s money actually kept and who controls whether it has been used differently than advertised?
For example, we are currently seeing the insolvent trading platform FTX, which typically wanted to be much more than just an “exchange market”, that many billions of dollars in client funds disappeared or were transferred to other parts of the business.
Disclosure and control issues related to cybersecurity, but also to internal structures, are extremely important. This is probably true overall for all exchanges and facilities in this segment. Until there is good control, there will be no solid and trustworthy structure.
“Cryptocurrency remains a gray theory without actors”
tagesschau.de: What steps should crypto exchanges take towards transparency to gain investor confidence?
cranes: Interestingly, a frequently heard argument from cryptocurrency investors is that no external institution is needed to monitor transactions. The system controls and monitors itself using the underlying algorithm, the blockchain.
This relies on decentralized control, so a key argument in favor of these alternative currencies is often that their control is internal. Unfortunately, the argument does not apply to the actors involved in a transaction – and without actors, a cryptocurrency remains gray theory.
Has the crypto scene had its day?
tagesschau.de: What potential is there in the crypto industry?
cranes: Today’s crypto scene, in my view, will hardly have a great future in our financial system – simply because the opportunities for fraud are too great, too easy. And because any government regulation, if it happens, will take away the allure of decentralization and remoteness from the state, which characterizes cryptocurrencies in the eyes of many investors – and will also make transactions even more expensive.
However, there is likely a future for cryptocurrencies on the fringes of our financial system, as countries like Russia use these tools to circumvent sanctions. For private investors, on the other hand, I see a big potential for loss, especially because there are too many players in this industry who want to enrich themselves at the expense of investors.
It is extremely easy in this scene, and it should be remembered that a cryptocurrency that is not legal tender still only has the properties of a Ponzi scheme and therefore has no permanent value. .
On the other hand, I see a brighter future for digital financial products in general and for digital central bank money in particular. I expect them to be introduced as soon as possible.
The waves of bankruptcies are a “revelation”
tagesschau.de: Suppose cryptocurrencies are banned. So what will happen to crypto exchanges? Will these then be nationalized and will the investors’ money then disappear?
cranes: Banning cryptocurrencies is not that simple because the system is completely decentralized. There is no easy starting point for state regulation. When it comes to the blockchain, the events of the FTX crypto exchange are an eye opener for many investors, who said there is absolute transparency and credibility here. The crypto industry uses blockchain as a foundation, but behind it often changes business processes that invite theft and are difficult to recognize as such.
The blockchain that underpins all of this is an ingenious invention. It is a technical reservation system without the need for a control body to verify the accuracy of the reservations. It is a great success. But what can be done with this service as a cost-effective product is still unclear to this day.