Under the New Regulated Environment, Crypto Exchanges Continue to Facilitate Circle of Cryptocurrencies
As the new year commences, it's challenging to recall another instance where the cryptocurrency market and the overall atmosphere surrounding it have felt so optimistic. Unlike previous times, this current wave feels less precarious and more enduring. The assurance of regulations and the surge of institutional investment and interest imply that cryptocurrency's future is gradually becoming intertwined with Traditional Finance (TradFi). However, what does this mean for the original players, the Centralized Exchanges (CEXs) that have navigated the regulatory hurdles for so long?
2025 marks the first time that the established ecosystem of crypto-native operators, including Industry giants like Coinbase, Binance, Kraken, and others, will encounter competition from TradFi banks and brokers.
In the EU, the Markets in Crypto-Assets (MiCA) regulation has created a smooth path for ESMA-licensed banks and brokers to expand into the crypto-asset sphere, while mandating that crypto-native firms and newcomers undergo a comprehensive licensing process.
In the US, many firms are now turning to the Trump administration to command executive orders supportive of the crypto sector from his initial days in office. Such a move would provide long-anticipated regulatory clarity to the US crypto sector, where firms such as Coinbase and Binance have been locked in a prolonged battle with the SEC under Biden's leadership.
Trump now appears poised to provide some relief – but it comes at a potential price. Once the new administration clears the obstacles from the runway for crypto-native firms, it's clear for everyone, including traditional banks, brokers, and fintechs. Robinhood, a firm that straddles the boundary of fintech and crypto, added 420,000 customers during cryptocurrency's post-election surge last November.
So, some critical questions arise. Will customers continue to use exchanges when they can just as easily trade cryptocurrencies via their bank or brokerage account? How will established CEXs maintain their market position and attract new customers in this newly favorable regulatory environment?
Navigating a new terrain
While the sudden influx of competition undeniably poses challenges for the established crypto sector, there are several aspects that still work in its favor.
Firstly, most banks and brokers contemplating a retail crypto offering aren't necessarily looking to create liquidity from scratch. A more expedient method to market entry is to leverage existing pools of liquidity through partnerships with crypto brokers and liquidity aggregators. For instance, in May of the previous year, Bitpanda extended a partnership with Austrian bank Raiffeisen to 55 banks across the nation in preparation for the new MiCA rules.
Via collaborations such as these, centralized exchanges capable of maintaining liquidity shall remain crucial hubs for a growing industry, facilitating large-scale trades and playing a significant role in price discovery.
Another unique selling proposition for crypto exchanges in an increasingly dense market is industry and technological expertise. Cryptocurrencies boast numerous unique characteristics, such as the underlying blockchain technology and innovations like staking and Decentralized Finance (DeFi). In March 2024, crypto custodian Taurus partnered with staking platform Lido to enable Swiss banks to offer liquid staking to their customers.
With an established reputation, comprehensive industry networks, and connectivity, CEXs can also function as a trusted partner for both institutional and retail users navigating these uncharted waters.
Although the advent of regulations invariably paves the way for competition, the advantages work both ways. Particularly for US crypto firms that have spent years either confronting the SEC or operating beneath its radar, there's now a chance to compete on an equal footing. Exchanges and other operators can showcase that they adhere to the same standards of compliance and transparency as any other financial institution, with a similar level of freedom to operate.
While the crypto industry deserves a moment of jubilation, the truth is that the landscape is likely to alter swiftly following the inauguration on January 20, with an influx of new operators and partnerships. Established crypto firms will need to define their Unique Selling Proposition (USP) in this newly competitive market, with an opportunity to function as a bridge between the realms of traditional and emerging finance.
- In this new regulatory environment, Centralized Exchanges (CEXs) like Coinbase and Binance can leverage their industry and technological expertise, such as partnerships with staking platforms like Lido, to continue being trusted hubs for large-scale trades and price discovery in Decentralized Finance (Defi).
- Following the implementation of MiCA regulation in the EU, ESMA-licensed banks and brokers are now able to expand their services into the crypto-asset sphere, but they often rely on existing pools of liquidity from crypto brokers and liquidity aggregators to enter the market, making CEXs like Bitpanda crucial for maintaining liquidity.
- With Trump now potentially providing regulatory clarity for the US crypto sector, Centralized Exchanges (CEXs) will have the opportunity to compete on an equal footing with TradFi banks and brokers, showcasing their adherence to compliance and transparency standards, just like any other financial institution, thanks to the assurance of regulations and clearer guidelines.
