Here’s What You Need to Know About Crypto Exchanges

Like traditional financial assets, exchanges play a key role for Bitcoin and other digital currencies. And just as history has shown in equities and futures markets, crypto exchanges can become a problematic element of the rapidly emerging world of digital assets. On the surface, they look a lot like stock markets, matching buyers with sellers and publishing prices. Yet in many ways they differ vastly, potentially exposing investors to risks they may not fully appreciate. That’s worrying regulators and prompting new exchanges to come up with ways to mitigate the dangers.

They share a key function, as places to trade assets, but the similarity ends there. Crypto exchanges both hold an investor’s assets and charge brokerage commissions, functions that are normally segregated in the world of stocks. That helps to make many exchanges highly lucrative, as do the fact the fees they charge are fatter than traditional bourses’. For example, Japan’s second-biggest crypto venue, Coincheck Inc., was almost as profitable in 2017 as Japan Exchange Group, operator of the nation’s biggest stocks and derivatives markets. Another crucial difference: While stock markets are tightly regulated, their digital-asset counterparts so far have very little, if any, supervision in most jurisdictions.