Originally published by Vadim Svidersky in Novosti Forex
Expert opinion: Denis Kiselev, Creator of FXTM Invest, analyzed two sectors and compared solutions for cryptocurrency trading.
Nowadays world is changing rapidly through technological innovations. The first PC and simplified calculations, record management, and financial statements. Then the Internet appeared and made the world more global and connected. The next step was the blockchain technology or the distributed ledger, which generated decentralized and anonymous digital money called cryptocurrency–an alternative to fiat currencies controlled by Central Banks. And the crypto was adopted. However, the number of payments with cryptocurrencies is not so big for now, but bitcoin and altcoins with high volatility have become a popular subject of trading as a speculation tool, in order to make money on changes in the quote rate.
The popularity of the crypto is understandable: although the risks of speculation on the rates of digital money are high and the market sometimes resembles a rollercoaster, it promises significant profits. In 2017, the price of Bitcoin increased 19 times, Ethereum – 106 times, Ripple – 175 times, and Litecoin – 79 times. Such attractive figures intrigued many people. As a result, trading platforms began to pop up rapidly. The opportunity to trade is offered by all: from brokers to huge specialized exchanges, Forex and New York securities markets with BTC futures and derivatives.
Expert in OTC trading and financial technologies development, Denis Kiselev, FinTech Specialist, the Founder of FXTM Invest service (Forextime.com) and the former Head of the Investment Technologies Department in Alpari, analyzed and compared solutions in digital currencies trading offered by Forex brokers with solutions by cryptocurrency exchanges. Do these two sectors compete or interact, and which is better for the user?
Crypto Exchanges Analysis
Development of crypto exchanges and market dynamics.
The first crypto exchange, Mt. Gox, appeared in 2010, 2 years after the invention of BTC. Now, after less than 8 years, according to Coinmarketcap the number of crypto exchanges is 208, and over 500, according to Bitcoin.com. And this is without a detailed count of local exchanges focused on national markets and available only in a particular region.
The number of users is constantly growing. In 2017, the growth of the largest exchanges exceeded 20%, and the number of users grew by an average of 4.9%. Most users are from the USA, Canada and Western Europe. Global exchanges are not focused on attracting users by regions. They often do not have language versions, technical support, and their advertising campaigns are not taking into account the user’s nationality and location.
Crypto Exchanges Status
Crypto exchanges appeared on the market together with the invention of cryptocurrencies. As the excitement around digital money grew, the number of specialized exchanges grew more and more. But in this case, youth is not an advantage. Software and legal status of exchanges are often doubtful and periodically loud scandals about theft of funds, loss of customer coins as a result of a system error, litigation and bans by government agencies arise. Of course, leaders of the industry, crypto exchanges with well-known names like Binance, have not so many problems, but, nevertheless, they also have their presence in media.
Exchanges also have problems with customer support. Customer verification is often limited due to technical errors and the registration of new users is suspended. This occasionally happen when the software does not withstand the influx of new users or technical support can’t cope with such a flow behind the next growth in the exchange rate, as well as after hack attacks and system errors, which exchanges are exposed to, as they are one of the main goals of hackers these days. Problems with the interface and language versions are also very frequent.
Hacking Danger And Client Protection
Cryptocurrency exchange hacks are a common phenomenon. Several times a year, the largest cryptocurrency exchanges lose millions of clients’ dollars. The latest high-profile event was the hacking of South Korean major player, Bithumb. As a result, company lost $31.5 million. Prior to this news, scandals concerning Coinrail and Coincheck hacks generated almost as much buzz. Cybersecurity company Carbon Black estimates that hackers stole about $1.1 billion funds from exchanges just in the first half of 2018.
Investors are often not protected on crypto exchanges and do so at their own risk, not having legal guarantees. The exception is the US exchanges. In terms of regulation, the situation is stable there and investors are protected by law. Working with the exchange, it is important to understand that in case of a hack attack or a system error, in the result of which your account will be zeroed, there is no guarantee that you will receive your funds back. What concerns large exchanges, there were cases when clients returned their money. This was possible due to the high liquidity and turnover of these exchanges, with the help of which they are able to cover such costs. But remember, at least the story with YotBit, when after the second for the year hack attack and theft of 17% of funds, the exchange filed bankruptcy. Clients received back 75% of the funds stored on their balance sheets. This story tells us that in case of a grand theft, even a global exchange can shut down. And smaller exchanges are more likely to do so. And in most cases litigation will not give any result because of the nuances with the status of such companies at the legislative level.
In addition, the risks of hacking are also high. Hackers find cryptocurrency exchanges very attractive, as there are a lot of breaches and money. They only intensified their attacks. According to the Kaspersky Service, the number of DDoS attacks on crypto exchanges increased by 36% in 2017. In the second quarter, hackers attacked resources of 86 countries, and in the third quarter they increased the geography of attacks to 98 countries. Most of attacks (51.56%) were made from China. Most often, cybercriminals attacked platforms in China (63.3%), the United States (12.98%), South Korea (8.7%) and Russia (1.58%).
It is worth considering that the hacking of large exchanges affects the exchange rate of cryptocurrencies. Now, despite the great variety of crypto exchanges, 18% of the total trading volume falls on Binance, and more than half of the trades on only three global exchanges (including Binance). Their hack can lead to collapse in Bitcoin price and other altcoins. Reducing the impact of large stock exchanges due to participation of regional exchanges and brokers will allow making the rate of the crypto more stable.
Relations With Banks
Banks and cryptocurrency firms regularly have difficulties. In February 2018, three of the largest US banks, such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. stopped servicing credit cards operations connected to cryptocurrencies. And starting from March 21, fiat deposits via SWIFT were forbidden at the American crypto exchange Kraken.
Canadian banks differed in their opinion: the largest Canadian Bank Toronto-Dominion Bank has banned the use of credit cards for buying crypto. And the Royal Bank of Canada allowed buying cryptocurrencies with credit cards with risk warning.
The British financial conglomerate Lloyds Banking Group also banned the use of credit cards for buying tokens.
VISA has stopped servicing the largest crypto companies Bitpay, TenX, Bitwala, the Issuer of BTC cards WaveCrest Holdings Limited, with which most blockchain startups cooperate.
South Korean Shinhan Bank and KB Kookmin Bank banned any transactions with BTC after the governmental decision to tighten the regulation of the crypto. Banks that provided accounts for crypto trading at the beginning of the year were subjected to state checks.
Indian crypto exchanges are also experiencing problems with banking services. There are rumors that the reason for this is the tacit ban of the Reserve Bank of India. As a result, India’s largest exchanges, Koinex and Coindelta, were left without banking servicing inside the country. And the management of Citibank India sent customers a notification about the prohibition to buy cryptocurrencies using debit and credit cards.
At the end of the last year, the Bank of Russia prohibited Moscow-based exchange to trade BTC futures until the legislation on the regulation of crypto assets is ready.
Switzerland treats cryptocurrencies more loyally. Swissquote, together with BitStamp exchange, launched a service for BTC trading. And Falcon Private Bank offered its customers management services for bitcoin, Ethereum, Litecoin, and Bitcoin Cash.
As you can see, the relationship between banks and exchanges are complex – in some countries they regularly fall out of favor, which affects clients.
Software
At this stage, verified “box version” software for crypto exchanges is virtually absent. Therefore, it has to be developed from scratch. This is quite a complex and expensive task. And even if the company decides to pay for the development, the final product often has a lot of technical problems. Many people try to save money and take open source code software and modify it. The final product has many “breaches” in security, vulnerable for hackers.
In both cases, customer wants to receive the finished product as soon as possible. There are problems with performance, and with the software itself, which are solved in a running product. As a result, there are numerous bugs and security issues.
Industry Problems And Their Solutions
The cryptocurrency exchange industry has a large pool of users and fans around the world. Cryptocurrency investors and traders are active members of the global crypto community. But this area still has many problems:
Tension in interaction with banks, regular bans, closing of accounts, problems with the withdrawal of money in the fiat equivalent; Errors, hack attacks regularly occurring even on major exchanges and leading to the loss of funds;
Not good enough software with many vulnerabilities leading to difficulties in the work and loss of funds;
Problems with state regulation in a number of countries; Lack of regional focus in advertising campaigns, infrastructure preparation, technical support, which creates problems with the coverage of the audience in the regions of Eastern Europe, South America, the Caucasus.
Analysis Of Forex Brokers
Industry Development
International financial market Forex appeared in 1976, not only before the appearance of hype around tokens, but even before the appearance of the Internet. Its formation in the state known to us now (retail Forex) began about 20 years ago with the appearance of the Internet. The advent of the Internet marked the beginning of currency trading online. Many companies and Forex brokers have appeared. It became possible to open an account, deposit funds and trade online. According to Interfax, two-thirds of clients, more than 260 thousand people, fall on three leaders working in Russia, generating about 300 billion dollars (69%) of total turnover.
Regulation And Client Protection
For 20 years of industry existence, all business processes are fairly standardized and transparent: registration and user verification, license obtaining, regulation, disputes resolution, submission of reports to regulators, etc.
It is also noteworthy that we didn’t manage to find any mention of serious incidents with hacking of Forex brokers on the Internet, not only in Russian web, but also through queries in English.
Forex brokers are subject to the laws of the country in which they are registered. When the broker’s jurisdiction is in one of the island states, the regulation will be implemented in accordance with the island legislation, which practically gives the client no guarantees. But if it’s a European or Cypriot broker, the situation is much more reliable. Since the Forex market has existed for a long time, the developed countries of the world have successfully formed regulations. In the UK, Forex is regulated by the FSA (Financial Services Authority). It struggles against fraud, offenses, provides legal protection for clients.
Cyprus Forex regulation is administered by the CySEC service (Cyprus Securities and Exchange Commission). It was established in 2001 to supervise companies related to securities and investments in the territory of Cyprus. But when Cyprus joined the EU in 2004, CySEC’s powers were expanded and the Commission’s sphere of influence extended beyond the state. CySEC has become one of the world’s major financial regulators and many investment and Forex companies intentionally obtain license in it.
Since January 1, 2016, Forex in Russia is regulated by the Central Bank and its accredited SRO (self-regulatory organizations). In real life, there is a law, but there are no convenient mechanisms for its observance, so “Russian” Forex brokers provide services in the territory of the Russian Federation via foreign companies.
In every country where there is Forex regulation, banks cooperate with brokers and clients can easily deposit and withdraw funds to a bank card or account.
Software
For 20 years of experience, Forex has developed high market standards for software for the work of brokers. Now there are many high-quality programs, both paid and free to trade and track the progress of trading. For example, MetaTrader, cTrader, etc. Their security is provided by encryption, SMS confirmation, transaction history, data backup system.
The Interaction Of Crypto Exchanges And Forex Brokers
Do Forex Brokers And Crypto Exchanges Compete?
The intensity of the crypto market development has caused demand for investments in crypto. Forex brokers have joined the play. Seeing the appearance of new instruments and the demand for them, they began to quickly adapt to new realities and try to get their place in the hype. Moreover, they already had a lot of trading instruments from a technical point of view and adding a few more was not so difficult.
On traditional crypto exchanges, tokens are traded for other cryptocurrencies, mainly for dollars, but sometimes for other currencies – euros and rubles, on Forex it is CFD trading. CFD – contract for difference in the market asset price. There is no actual purchase of the asset, and only the fact of change in its price is used. Ultimately, if there is a goal of speculation, there is no fundamental difference for a trader — a CFD of a Forex broker or a real exchange transaction with the purchase of an asset.
Do Forex brokers and cryptocurrency exchanges compete? Certainly. There is a struggle for clients who want to trade crypto assets, and, in this case, Forex brokers enter “foreign territory.” But the interesting fact is that Forex brokers are forced to cooperate with crypto exchanges to trade the crypto. To provide cryptocurrency trading to their clients, brokers need quotes and opportunity of hedging to minimize risks. To do this, at the moment it is more convenient and reasonable to use large cryptocurrency exchanges.
With this cooperation, the crypto exchange receives huge clients in the form of Forex brokers, thereby receiving additional profits. Also, a large pool of Forex traders is a good primary base for crypto exchanges. In its turn, the broker gets the opportunity to add new trading instruments, which makes it possible to get new clients and expand the instruments for the current ones.
At the same time, of course, there is a direct competition — the exchange, giving its liquidity to the Forex broker, helps the indirect competitor and receives less part of the clients who will trade through the broker. A broker loses part of its clients who go to trade on the stock exchange (if the broker did not have time to add cryptocurrencies, or the client wants to be closer to the real assets and be able to withdraw them). Forex broker will also receive less new customers focused on gambling, because they will react to “Bitcoin trading” advertising and will take no notice of Forex in principle.
How The Cooperation Of Brokers And Exchanges Affects Clients And Market
When we talk about the impact of such interaction, although exchanges and brokers receive both pros and cons, cooperation remains profitable. Trading volumes, number of clients and liquidity are growing for both brokers and exchanges. Separately, brokers and exchanges simply would not receive a part of the clients, and so, although they share profits with each other, but they still get it. At the same time, the cryptocurrency market, the number of investors and traders, the investment into the sphere is growing and this positively affects the industry as a whole.
Users are free to choose how and where to trade: they can go to the exchange, and can apply to the broker and trade through it. In the first case, the set of instruments is wider and the opportunity to withdraw crypto assets is higher. In the second case, it is possible to get a higher level of service, while the choice of coins is less and there is no possibility of a real purchase.
Competition generates an increase in the quality of services provided. The number of speculative instruments is growing, there is an opportunity to trade on exchanges with leverage, and brokers are increasing the number of cryptocurrencies traded.
Summary
We are witnessing another technological revolution, which is led by blockchain and cryptocurrency. And we also see how actively Forex brokers involved in the struggle for new crypto-clients. Two industries, Crypto exchanges and the Forex market began to interact.
Chances are high that these industries will exist separately, meeting only in the issue of liquidity. But it is also likely that in the near future the line will be erased, and “financial multi-combines” will appear at the market, giving the opportunity to trade cryptocurrencies with the real purchase of assets, and to provide trading non-physically delivered currency pairs.
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