Pay Dues To Caesar And Get Licensed

Following a rapid-fire series of global crypto licenses being granted to FTX and Binance, the derivatives powerhouses appear to be leaving behind a past when they operated across more than 100 countries from the comfort of remote workspaces, but with almost no regulatory oversight. In 2022, the narrative is decidedly pro-regulation, and the largest, least regulated operators are under pressure to procure many, conceivably dozens of licenses globally.

The level of regulatory adoption weighed heavily on the methodology of the inaugural Forbes’ Best Global Crypto Exchange ranking announced last week where in spite of their massive daily volumes and broad brand recognition FTX was only ranked fifth in the world and Binance sixth. Twenty five percent of the Forbes ranked exchanges had no known licenses.

Though not every exchange around the world will likely take the regulated path, the sheer number of newly announced licenses from these leaders suggest that 2022 is already poised to become the year of crypto regulations.

• FTX Australia. On March 21, FTX Australia launches with a license from the Australian Securities and Investments Commission (ASIC), giving it the ability to offer both crypto and non-crypto products.
• FTX in Africa. On March 16, FTX announces its partnership with Kenyan-based AZA Finance, an European-licensed fintech firm with global payments experience operating in frontier countries, such as 10 African nations.
• Binance expands in the Gulf. On March 15, Binance secures a crypto-asset service provider license from the Bahrain central bank and a day later unveils a license from the newly-formed Virtual Asset Regulatory Authority (VARA) in Dubai.
• FTX Europe. On March 7, FTX announces that FTX Europe (FTX.com/EU) will start serving the European and Middle East (EMEA) region from a Swiss headquarters, and dual registration in Cyprus and Dubai.
• FTX in Asia. On February 2, FTX Trading Ltd acquires Liquid Group, gaining a crypto exchange from Japan’s Kanto Finance Bureau and a separate provisional crypto license with the Monetary Authority of Singapore (MAS).
• FTX.US raises capital. In January, FTX.US, the U.S. arm of FTX, raises $400 million at a $8 billion valuation to carry out its expansion plans in the United States. The firm has been regulated with FinCEN and with state regulators for money transmitter activity. It is also regulated by the U.S. CFTC following its acquisition of LedgerX in October 2021.

Why now?

There are many reasons for this strong streak of regulatory licenses, which are the modern day equivalent of paying your dues to Caesar. Perhaps the biggest reason is that for FTX and Binance to continue to grow their market share, they’ll need to stay clear of the wrath of regulators. Regulators maintain a list of sanctions against individuals and companies and proper anti-money-laundering (AML) and know-your-customer (KYC) implementation by individual financial firms is what gives real teeth to sanctions.

Up until recently, AML and KYC compliance was an afterthought for most crypto exchanges but that is changing. There’s money to be made serving law-abiding citizens and companies. Investors, such as those who FTX attracted last year when it raised $1.4 billion during a Series B round, also want the firm to operate without reproach – to protect their interest. FTX.US CEO Brett Harrison recently told Bloomberg that “Every single day we have to block sanctioned activity.”

More than just being crucial to raising capital, being compliant, is good marketing. Procuring licenses helps assuage regulatory concern that crypto exchanges are running wild. Increasingly, we’re seeing fund managers switching from less regulated exchanges to those that are more compliant. These same fund managers are the clients that boost a critical business for both Binance and FTX – perpetual contracts trading activity.

Forbes estimates that 75% of Binance’s $56 billion in daily trading activity on Monday originated from perpetual contracts, with each of the top nine perpetual trading pairs generating more than $1 billion in daily volume. According to Coinglass, Binance’s trading activity is equivalent to at least 47% of perpetual trading activity, while FTX controls 8%. It is quite conceivable that FTX is pursuing this strong regulatory card to gain market share in this competitive market.

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